Let’s Dance: Warner Music raises cash ahead of Bowie deal

IFR 2410 - 20 Nov 2021 - 26 Nov 2021
5 min read
David Bell, Gareth Gore

Warner Music has raised US$535m in the high-yield bond market ahead of what is expected to be one of the record label’s biggest deals ever – the acquisition of publishing rights to the entire back catalogue of legendary singer David Bowie from his estate.

The deal comes just two months after Warner signed a deal, also with Bowie’s estate, to buy masters rights to his material from 2000 onwards. The label acquired the masters rights to his earlier material eight years ago when it bought UK rival Parlophone.

Masters rights are linked to the actual recordings and are usually held by record labels. They are often split from the intellectual property of the publishing rights. A deal for the two together would give Warner unprecedented control over Bowie’s back catalogue.

While the acquisition is not finalised yet, Warner is clearly keen to line up finance for the mooted US$200m deal. On Wednesday, it sold the eight-year non-call three senior secured notes via its WMG Acquisition Corp subsidiary at a cash price of 99.145 to yield 3.875%.

The bond comes amid a surge in interest in music catalogues, as labels and investors seek to lock in growing revenues from streaming services. Warner struck a landmark deal with Madonna for both the masters and publishing rights to her entire back catalogue in August.

"You can argue music is intellectual infrastructure and there is always demand for it, and streaming services have definitely reinforced that," said one high-yield bond manager. "The question is what multiple do you pay for it. When the music industry was more physical it was harder to get your hands around the valuation of assets, but streaming services allow you to be a bit more scientific about it rather than just putting your finger in the air."

The WMG Acquisition Corp vehicle has been its preferred financing vehicle for these recent deals. The subsidiary issued a US$550m 3% 2031 senior secured note in August last year before tapping those bonds for another US$250m two months later.

In the euro market, WMG raised €445m with a 10-year bond for debt refinancing in August this year.

Bond investors have shown similarly strong interest in financing these investments, with the growth of streaming services arguably making it easier for investors to value the assets and model future cashflows.

"It's a growth story – the market is generally bullish on content and it's coming with relatively low leverage and a massive market cap," said a second investor. "Anything like that trades in the same ballpark – around 4%, plus or minus."

Bowie bonds

The Bowie estate has almost unique control over both the masters and publishing rights to the late singer’s entire back catalogue – thanks to a groundbreaking deal struck by his manager Tony Defries with Mercury Records' co-founder Irwin Steinberg in 1971 to buy the masters for just £18,000.

“They perceived that our weakness might be that David couldn't afford to buy himself out of the contract,” Defries told IFR in an interview for an upcoming podcast on Bowie's foray into the capital markets. “He told me that they'd spent a great deal of money on promoting David and making records and they had this overhanging deficit.

“And I said, ‘well how much is it?’ And he said – he didn’t know offhand, but he could get me a number. And I said, ‘if I pay you everything outstanding, will you release the masters and all the other material you have?’ And he said he would, which was a mistake.”

In exchange, Bowie agreed to split all future profits 50:50 with Defries – but that agreement would soon backfire as the two men fell out just a few years later.

In 1998, the singer securitised his back catalogue – via what came to be called Bowie bonds – for US$55m as a way of raising cash to buy Defries out of the old deal.

“I didn't want to spend the time anymore,” said Defries. “Every time there was a new catalogue deal to do, or some new synchronisation licence to grant, or some new issue that had come up, I'd have to go back and forth and back and forth and back and forth.

“The amount of time and effort going into actually making things that should have just required a simple ‘yes we should do this’ as opposed to weeks and months of argument about why, what, how and when … So I decided, if you really want to buy me out, let's fix the price.”

It is unclear what the terms of the latest deal between Warner and the Bowie estate will be. Bowie, whose real name was David Jones, died following a battle with cancer in 2016 and left his estate to his second wife Iman and two children Duncan and Alexandria Jones.

Warner Music and the bookrunner Credit Suisse did not respond to requests for comment.