Securitisation is not a glamour industry. So it is not surprising that David Pullman's deals for the likes of David Bowie and Holland Dozier and Holland have generated almost more press coverage than the rest of the industry put together. Now, the prospect of Michael Jackson joining this group of issuers could be enough to have executives across the market dusting off their leather jackets and heading for Soho, writes Louise Bowman.
The market for future royalty income securitisation was launched with David Bowie's "Bowie bonds" in February 1997. That deal was put together by Pullman when he was part of the structured asset sales division at Wall Street investment firm Fahnestock & Co. This group was hived off into a division of the company in June this year and renamed The Pullman Group - an indication of how fundamental Pullman's involvement has been to the success of the business.
Despite the attention it attracts, future royalty securitisation accounts for a fraction of the ABS market - and will always remain so. The attraction to Pullman's target audience - which in addition to rock stars includes sports stars, authors and film and TV companies - is not hard to see. It allows the artist to diversify their source of funds, avoid public disclosure of their finances (as the bonds are sold as private placements) and raise cash without having to sell off any of their assets. The attractions of such deals to investors, however, are harder to see. The huge and liquid mortgage and credit card-backed bond markets are a much safer - if less lucrative - bet. Future royalty deals are not for everyone.
The first thing any investor in a securitisation deal looks at is the assets themselves. In the case of entertainment industry royalty futures, there is the inherent contradiction that investors only want to look at really successful, global stars - who, because they are so successful, usually don't need to raise any cash. The market is, therefore, limited to issuers of the calibre of David Bowie, which usually have a specific need for the money - Bowie used the US$55m raised through his securitisation to buy out his manager.
Longevity is one of the most important criteria. "We could not do a deal for someone who is very successful at the moment, like the Spice Girls, as they are a short-term phenomenon," says Pullman. Even a star of the calibre of Luciano Pavarotti does not fit the bill (the opera star has looked at the structure). "Ten or 20 years from now, the big opera star will be someone else," he says.
Thus, the potential market is small and illiquid. The two deals completed so far have been sold to single buyers. The Bowie bonds were bought by Prudential Insurance and the US$30m Holland Dozier and Holland deal - completed in April this year - was sold to Connecticut-based Structured Finance Advisors on behalf of a group of insurers.
But investors are rewarded for their risk-taking. The Single A rated Holland Dozier and Holland bonds carried a coupon between 7% and 8% for a 15-year expected maturity - 10-year US Treasuries pay 5.44% and a comparable Single A rated corporate bond pays less than 7%.
Pullman is now addressing this problem by pooling intellectual property assets to gain access to a larger pool of potential issuers. "Pooling intellectual property rights enables much smaller tranches to be structured for each artist - these tend to be US$25m pools," he says. "This opens up the market and makes many more deals possible." Investors like pooled deals as they reduce their exposure to any one artist.
I love rock n' roll
The Pullman Group closed a deal in November for a pool of artists including Rod Stewart, Heart, Kim Carnes, Pat Benatar, Eddie Money, Tupac Shakur and Notorious BIG. Pullman has also recently concluded a deal with songwriter Jake Hooker for a pool of hits from artists including Joan Jett. These are all issuers that would not be able to tap the market on their own. Pullman has recently hired a team of music industry professionals to give him the cutting edge in forging contacts within the industry.
Reducing exposure to a single artist is a big concern for investors. Few have an intimate knowledge of the music industry and therefore rely heavily on the advice and opinion of the rating agencies. The risks they are taking on are very different from other future flow securitisations - and differ from deal to deal.
One of the hardest risks to price is the fact that the investor is not only buying into an artist's back catalogue but into the artist themselves. Investors in future royalty bonds are, therefore, running a high risk that an unforeseen future event could catastrophically affect the performance of the portfolio.
These types of concerns often kill deals. For example, Pullman considered a US$20m deal for Frank Thomas, first baseman with the Chicago White Sox. "The deal was based on his contract," Pullman explains, "but was pulled because there were simply too many 'outs'." These included the fact that the star had to stay physically fit, he could go on one strike and the entire league could be suspended or "locked out" due to an industrial dispute - as the basketball league (NBA) is at the moment.
The proposed deal with Michael Jackson involves a portion of his catalogue of Sony ATV rights and will carry a Sony corporate guarantee. It will not, therefore, be a risk based on the artist. Jackson's record sales have suffered since he was the subject of child abuse allegations -- a graphic illustration of the kind of risks that investors run on single artist deals.
Given the amount of publicity these deals attract, it is remarkable that just two deals have so far been done. Pullman retains his stranglehold on the market partly because the deals are private placements and, therefore, very hard to copy. The other reason is cost. "We have spent seven figures developing the legal documentation for this," he explains. "We have front-loaded the cost, which makes it very hard for the competition to break through. It is not the kind of asset that you can throw 100 people at - it is phenomenally expensive."
After the Bowie bond was launched in 1997, interest in the product was enormous. A one-day conference on securitising entertainment industry revenues attracted more than 400 delegates. Several houses, including Nomura and Bear Stearns, set up teams to concentrate on intellectual property bonds, but little progress was made. Nomura closed a US$15.4m deal for Rod Stewart in April this year, but it was a securitised loan rather than a true asset-backed bond issue.
"We passed on this deal because the rate was too low. It was done off EMI's credit, not Rod Stewart's," says Pullman. And the Pullman Group's position remains secure. "We simply do not have any competition as no-one else has done a deal yet," says Pullman. "We will only have competition when that happens."
Despite the potential of intellectual property rights pooling, Pullman insists he will continue to focus on single artist deals. "We are working an another deal for a songwriting team and a TV syndication rights deal is also in the pipeline," he says. But asset pools such as the November deal are the way forward for the future royalty market - and may yet entice some other players to the table.