It has now been more than ten years since the introduction of the so-called Bowie bonds – regarded as the first ever music royalties future receivable securitisation – which gave rise to IP securitisation as a financing vehicle. In the years since the introduction of the Bowie bonds, a great deal has been written in the business and legal press and in academic journals about securitizing various IP portfolios from copyrights (particularly those associated with music and film) and patents (particularly those associated with pharmaceuticals and high technology) to trademarks and even trade secrets and domain names.
Bowie bonds were one of the first bond issued collateralized by intellectual property. Bowie bonds are asset-backed securities. These bonds are now referred to as Pullman bonds, because David Pullman was the banker that was in charge of setting up the David Bowie bonds. David Pullman convinced Bowie to forfeit his rights to all royalties for a 10-year period. Pullman then used those royalties to create the funding for the bonds. Bowie bonds are a type of bond that were created based on the rights to the albums that David Bowie made before 1990. These bonds were utilized in order to provide David Bowie with a cash payment in return for the rights to his albums.
Bowie bonds were originally issued in 1997 in a deal with the Prudential Insurance Company. The insurance company gave David Bowie an upfront payment of $55 million in return for the rights to the 25 albums that he owned prior to 1990. In a debt offering of this kind, the underlying copyrights would be used to secure the bonds. If the special-purpose vehicle (SPV) defaults on its payment obligations to bondholders, the copyrights are permanently transferred to the bondholders. Until the event of default, of course, the copyright owner would retain the copyrights subject to a security interest held by the bondholders. After the bond obligations are met, the copyright owner holds the copyrights free of the security interest (just as a homeowner that has paid mortgage debt in full owns a home free of the mortgage).The bonds provided the insurance company with a rate of return of 7.9 percent.
Bowie reportedly had a regular cash flow of more than US$1 million per year from ownership rights in the copyrights in much of his music catalogue dating back to the 1960s and to the recording masters. So rather than entering into a new traditional distribution agreement at the expiration of his existing recording and distribution agreement, Pullman devised the Bowie bonds to meet Bowie’s need for upfront cash.
Only limited information about the structure of the transaction is publicly available. The assets Bowie sold to the SPV included the right to certain future royalty payments from 25 pre-1990 albums he recorded (more than 300 copyrights). The SPV issued bonds and Bowie’s record distributor, EMI, provided certain credit enhancements. The bonds received a triple A investment grade rating by Moody’s Investors Services.
The Bowie bonds are not the only example of IP securitisation. In the years since the Bowie Bonds were first introduced, similar bonds backed by the royalties of musicians such as James Brown and the Isley Brothers have also appeared. These bonds have also remained in the institutional market.There also have been securitisations involving film catalogues as well. At least one securitisation involving patents for drugs has been done and publicised. Indeed, quite a few published articles have theorised that the possibilities for securitisations include portfolios of trade secrets, trademarks and domain names as well. However, if there have been such transactions, they have been kept fairly confidential and private.
When considering the intangible nature of intellectual property, perhaps it is not surprising that securitisations in this field have not become everyday, well-publicised transactions. Each type of intellectual property comes with its own peculiar set of complexities and unknown risks that are not common to commercial ventures involving tangible property.