Stars use Fame to Bond
By Russ Wiles
Forget about stocks, bonds and mutual funds for a moment. How would you like to invest in, say, David Bowie's music, Seinfeld reruns, Motown hits or John Steinbeck's novels?
As crazy as it sounds, financial instruments pegged to these and other types of intellectual property are available and eventually could be extended to mainstream investors, making it possible to add some pop culture to your portfolio.
"Intellectual property is the biggest asset category in the world," said David Pullman, the New York financier who helped Bowie sell $55 million worth of bonds two years ago. "Just think how many songs, TV shows, films and patents there are."
Wall Street certainly has been thinking about it.
For the past decade and a half, investment bankers have been dreaming up new and increasing exotic types of bonds backed by all sorts of unconventional assets. If it moves and generates a fairly predictable cash flow, a fianancier somewhere is trying to build a deal around it.
Bowie was the first to issue his own celebrity bonds, which are being paid off by royalties from record sales and publishing fees on his catalog of more than 300 songs.
Pullman also helped the Motown songwriting trio of Edward and Brian Holland and Lamont Dozier cash in last summer with a $30 million bond issue. They wrote such hits as Stop! In the Name of Love and Baby, I Need Your Loving.
And Pullman was the architect of a $10 million bond issue last fall by the singer-songwriting trio of Nickolas Ashford and Valerie Simpson, creators of such tunes as Ain't Nothing Like the Real Thing, Reach Out and Touch (Somebody's Hand) and Ain't No Mountain High Enough.
He also has put together some deals for songwriters associated with performers like Joan Jett and Rod Stewart.
All of these transactions and rumored dealings for Steinbeck's literary estate, Seinfeld reruns and a lot more have brought some glitz to the investment world of asset-backed securities. In essence, these are the bonds backed by the cash flow from some specific type of property. They differ from most government and corporate bonds, which are supported by an issuer's general pledge to repay investors but don't have any particular collateral behind them.
Asset-backed securities are an outgrowth of factoring, a business whereby some manufacturers raise cash by selling their receivables.
For various reasons, it can make sense for musicians, authors, actors, producers and other creative types to issue bonds backed by their royalties, say Pullman, who spoke at an asset-backed investment conference at the Arizona Biltmore this month.
For starters, the up-front money received from a bond sale isn't taxable but is considered a loan against future royalty income. The proceeds also can be invested to earn higher rates of return than the pace at which royalties are accruing.
Besides, celebrities retain ownership to the underlying assets and will start earning royalties again once bondholders are paid off in full, usually after 10 to 15 years. The great thing about intellectual property, Pullman says, it that it typically holds it values or appreciates over time, in contrast to cars, boats, computers, machinery and other equipment. Intellectual "assets often become more valuable, like a time capsule," he said.
For this reason, Pullman believes that literary estates and film libraries also could be ripe for securitization. He reports having held talks with the heirs of John Steinbeck, author of such classics as The Grapes of Wrath, East of Eden and Of Mice and Men.
Investors also can win by earning yields that typically are a bit higher than what they could receive on, say, corporate bonds that carry similar credit ratings. Yes, celebrity IOUs get their own credit ratings from independent evaluators such as Standard & Poor's Corp and Moody's Investors Services.
Bowie's bonds, for instance, garnered single-A grades on a scale where triple-A is tops and anything above double-B is pretty good.
"Bowie has the same rating as New York State," Pullman says.
Given the novelty and complexity of celebrity-bond transactions, the investment bankers behind these deals have not tried to market them to individual investors, although Pullman thinks that day will come. At the moment, the bonds are sold as private placements to a small number of big buyers. Insurance companies are the primary source of demand.
"We're comfortable with these bonds because you can look at the cash flows," said Diane Dales, director of private-placement investments at Pacific Life Insurance Co. in Newport Beach, Calif. "Also the bonds are secured by assets that don't deteriorate."
Pacific Life has been buying intellectual-property bonds for about a decade, including $30 million worth of music-royalty IOUs last year. Still, Dales says, the bonds account for only a small slice of the company's multibillion-dollar investment portfolio.
Although celebrity bonds are fairly new, other types of asset-backed securities have been around since the mid-1980s, and most consumers are tied into them in some way.
If you have a car or boat loan, your lender probably has sold your debt to an investment firm, which packaged it with those of hundreds of other consumers into bonds that were marketed to investors. Do you owe money on a credit card or a home-equity loan? These debts also are the stuff from which asset-backed securities are made.
If you own a house, your loan likely has been combined with hundreds of other primary mortgages and sold as a "Ginnie Mae," "Fannie Mae" or some similar of investment.
Anyone considering the purchase of a celebrity bond should remember that these investments carry inherent risks. In the music arena, for example, a small but potentially damaging one is the downloading of songs off the Internet, which could cut into sales and royalty payments.
A more basic treat is the danger that royalties could fall --- and investors could get hurt --- if a musical genre or artist falls out of favor. "Some of the heavy-metal bands are tough for us to get our arms around," said James Damron, assistant vice-president at Duff & Phelps, a bond-rating firm in Chicago.
Financiers say they prefer to deal with artists who have dropped out of the public eye since their royalty inflows are more predictable and not temporarily boosted by concert tours.
Songwriters also are attractive because people associate their music not with them but with the performing artists.
"If the songs are written in the '50s and '60s and the artists is either dead or no longer touring, you're safe, said Damron, another speaker at the Biltmore conference. "But if you're dealing with a high-profile artist who remains in the public eye, and you have to look more closely."
Avi Oster, a director at SG Cowen Securities Corp. in New York, put it more bluntly: "If we had securitized Michael Jackson's royalties, investors would have been killed."
The Arizona Republic, February 15, 1999.