Ain't Too Proud To Sell

In August 1998 the Pullman Group, a unit of Fahnestock & Co., announced the private placement of a $30 million bond issue secured by the royalties of the Motown songwriting team of Edward Holland, Lamont Dozier and Brian Holland, creators of such hits as "Ain't Too Proud to Beg" and "Baby Love."  Such bond deals provide songwriters with ingenious ways to receive cash up front and retain title to their songs over the long haul, rather than selling the rights to future royalties in exchange for a single lump sum.  Mark Tannenbaum of Bloomberg News spoke with David Pullman, managing director of the Pullman Group, about these unconventional asset-backed products, which he pioneered in 1997 when he arranged the sale of $55 million in bonds backed by future royalties on David Bowie's music -- the so-called Bowie bonds.

How did you get involved in creating asset-backed bonds?
I started in mortgage-backeds as a trader, before there were asset-backeds.  From that I got involved in trading whole loans; subperforming, nonperforming whole loans; and commercial mortgages.  I was always involved in the esoterics --- the exotics.   That developed into structuring deals in the newer asset classes: health care receivables, insurance premium finance loans and subprime auto.

How did you make the leap to Bowie bonds?
We had been following very closely the move in the capital markets to the valuation of intellectual property, and we saw it would be a lot more interesting to get into the market in its infancy than [to wait until it was] a fully mature market.

How do the artists respond to your ideas?
Bowie and Holland, Dozier and Holland got it right away.  These guys [understood] what securitization was more quickly than many of the [chief financial officers] of finance companies I have worked with over the years.  The songwriters tend to be the brightest.  Not only do they get it instantaneously; they're very supportive.   They're not afraid of falling.  These deals are not for the faint of heart, because deal killers come up constantly.

What's the motivation for the artists?
Bowie, specifically, was looking to sell his catalog.  And he got well in excess of the bids [received] from the major record companies.  Once he saw the numbers, he wasn't going to let go of his baby.  This was his legacy.  Holland, Dozier and Holland felt the same way.  They wanted to hold on to their catalog and pass it to the next generation.  This makes sense, because the value of catalogs has only gone up over time.  The best example is the story of Desi Arnaz.  He sold the I Love Lucy catalog in 1960 for $2 million, which [at the time] was a lot of money.   Now, I Love Lucy is on TV around the world 24 hours a day, seven days a week.  If we had been able to do these deals [back then], he would have a catalog today worth $100 million instead of having sold it for $2 million and paying 70 percent in taxes.

Will future deals be confined to music?
No.  But the reason music is predominant now and will continue [to be] is that unlike TV and film, where the studios own 99 percent of the copyrights, at least 50 percent of all the intellectual property --- the music, masters of the actual records, and publishing rights --- is owned by artists, songwriters, and independent companies.  It's a very fragmented market, which is perfect for us.  The majors --- {Bertelsmann Music Group], Polygram, [Walt Disney Co.,], et cetera --- have other [financing] alternatives.   If you're a Disney, you can do $100 million a year in bonds or commercial paper.   [The new type of bond presents] a unique position to empower the artists, the songwriter, and the independent so they don't have to sell out.  Over time they've been forced to sell because they haven't had the resources or the liquidity they'd like in their business or personal lives.

So far, the average size of deals has been small and the bonds sold only to private investors.  Will that trend continue?
Down the road we'll see deals that might eventually hit retail.  But for now I purposely do a deal that's private, so that people can't reverse engineer the deal.   Smaller deals are also attractive can't reverse engineer the deal.  Smaller deals are also attractive from the the [perspective of] investors because they're getting big premiums versus corporates by buying essentially similar ratings.

You mentioned these deals are not for the faint of heart.   What are the biggest concerns for investors approaching this field?
Actually, by the time the investor gets the transaction, it's fine.  It's the process of negotiating the terms and the documents and going through due diligence [when things can get rough].  It means litigation.  You're dealing with patents and trademarks.  There could be infringement issues.  The deals involve a lot of different disciplines.  But the investors is not the concern.  The concern is for the issue [who] spends all this money.  Is this deal going to happen?  Or is it going to blow up?  Nine times [out of 10] we run into a block and say, "That's it."  And the deals haven't gotten easier, which is something that has surprised me.  They all have to be tailor-made to different sets of issues."

BLOOMBERG, October 1998, page 118-119.