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Working Paper #07 Maximizing
Intellectual Property and Intangible Assets Case Studies in Intangible Asset Finance Ian Ellis
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 | Click here to download the PDF version of the full report. If you don't have the ability to read PDFs, get Acrobat now by clicking here. About the Author Ian Ellis is a master of business administration candidate at the University of
Chicago Booth School of Business. Previously, Mr. Ellis served in several
positions at the U.S. Department of Commerce in the administration of President
George W. Bush, where he specialized in intellectual property and international
trade policy. He has a bachelor of arts degree in political science from Acknowledgments The
author would like to thank Kenan Jarboe for the opportunity to lead this
project. The author would also like to thank Connie Chang, Richard Cohon,
Jonathan Low, Peter Harter, Mary Adams, Ken Jacobson, and Edward Meintzer for
their contributions. Any
errors or omissions are solely the responsibility of the author. This work is licensed under
the Creative Commons Attribution–Noncommercial–No Derivative Works 3.0 United
States License. To view a copy of this license, visit http://creativecommons.org/licenses/by-nc-nd/3.0/us. Table of ContentsStarting
with the Company Perspective Initial
Concerns: Monetization and Valuation Intangible
Asset Finance Models Intangible Asset–Focused Debt
Investment Intangible
Asset–Backed Lending Alternate
Model—Sale and Lease Back Analysis
and Policy Discussion Introduction and SummaryRecent advances in scientific and business innovation have rapidly transformed the world economy, creating new industries, displacing and altering older ones, and recalibrating business and commercial activity in many ways. As industry has invested in developing new technology and advancing other creative activities, the resulting intellectual capital has become a valuable asset class. Intangible assets—such as intellectual property (whether patents, trademarks, copyrights, or trade secrets), brand value, corporate reputation, franchises, and human capital—are now foundational for many companies and demand greater attention from managers and financiers. The capital markets and financial system have transformed in response to this new wave of industrial activity. Financial firms have invented new vehicles and updated existing models to provide capital to companies with significant value in intangible assets. Indeed, the changing nature of the assets and structures of companies today presents both challenges and opportunities in the field of finance. Specifically, how financial firms treat the intangible asset class is an enormous issue for capital investment in many of today’s fastest growing and most vibrant sectors of the economy. The development of financial products based on intangible assets is not the next exotic financial vehicle. The financial products discussed in this paper are some of the most basic financing mechanisms in business. The innovation is in recognizing the value of intangible assets for corporate finance. This paper seeks to address the primary issues in intangible asset (IA) finance facing financial firms and companies alike by profiling successfully structured and completed IA debt-and-equity deals. Specifically, case studies are presented as models for intangible asset–based lending and intangible asset–focused equity investment. The capital markets seek to efficiently allocate capital to promising enterprises. Many of today’s promising enterprises’ most valuable assets are intangible. The markets’ challenge is to create innovative funding mechanisms that can ensure the flow of capital to continue business development and investment in enterprises that are truly driving growth in today’s economy. Companies, in turn, will be able to access capital in new ways to finance innovation and expand their businesses. Starting with the Company PerspectiveBefore discussing specific intangible asset–focused financing vehicles, first consider how companies view capital-raising generally. For our purpose of examining these financing vehicles, we differentiate between small, start-up companies and large, established companies because of the inherent differences in their stages of development and their capital structures. Companies have a broad range of financing options—from debt to equity. All things being equal, they would prefer to exclude their intangible assets (IAs)—as they would any asset—from financing arrangements to protect these valuable resources from creditors and contractual obligations. For obvious reasons, companies tend to look first for sources of collateral that will yield the highest value with the least exposure of their assets. Companies are also apt to aggressively promote the value of their intangibles to investors when addressing valuations. For example, intellectual property (IP) is not simply a legal matter for defensive purposes. As an intangible asset, IP has real value in the marketplace and should be priced as such when debt or equity investments are arranged. For start-up and smaller companies looking to raise capital, the first viable sources of funding are angel and venture capital (VC) investors. As discussed in detail later, a number of equity investors focus solely on intangible asset investments. Although VC fundraising is now down and VC’s primary liquidation events, such as initial public offerings (IPOs) and mergers and acquisitions (M&A), have slowed[1]—VC funding remains an important source of start-up capital. Companies that do secure venture funding find they often require additional backing. A number of financial options exist, including returning to the angel/VC community for another round of equity investment. However, this can be a problematic strategy for a number of reasons for some companies. First, companies may not want to dilute current equity investors’ stakes in the company by bringing in new investors. Secondly, for companies that experience negative or slow growth after initial cash infusions, the prospect of a “down round”—where new investors value the company at a lower or similar valuation compared with the original position and then base their proposed equity position on this valuation—is even more unattractive to current equity holders. Companies may choose to pursue debt after an equity round. Debt is rarely the first option for a start-up company, apart from a few basic exceptions, such as inventory and equipment loans. Ultimately, however, debt financing is not necessarily an unfavorable initial funding option. As we attempt to demonstrate, utilizing intangibles to secure debt financing can be a viable option for start-up companies. For companies beyond the start-up phase, debt is often a more attractive option—both to finance ongoing operations and to expand. When choosing debt, companies may opt for more traditional instruments, such as leveraging accounts receivable or inventory. However, when considering debt options, intangible assets are a viable asset class that should be considered in capital-raising efforts. As discussed later, pure IA-based debt vehicles do exist and have been executed successfully. The venture debt market also plays an important role for companies in this stage. Venture debt is a hybrid equity-and-debt model that allows companies to access capital in loan form while issuing warrants for equity in the company in addition to the interest paid on the loan. This structure gives the debt issuer a strong upside as an incentive to lend to an otherwise risky enterprise. This spectrum of financing—equity, debt, and hybrids—offer smaller companies alternatives for meeting their early and mid-growth capital requirements. Intangibles can always play an important part in securing competitive terms and ensuring a proper and robust capital structure. Larger companies, especially publicly traded firms, have different motivations and prospects for securing additional capital. These firms often find the corporate bond market and other credit-based financing more attractive than asset-based lending. Asset-based debt can be a more expensive financing option and may not be the first choice of larger companies. This reality does not diminish the value of either credit-based financing or intangible asset–based lending because each option can work for companies, depending on their size and position in the marketplace. Initial Concerns: Monetization and ValuationUnderstanding the array of monetization options for intangible assets (IAs) helps illuminate their value in the marketplace. Generally speaking, companies can externally monetize their IAs through a sale, license, or some variation or combination thereof. An entire marketplace devoted to intellectual property (IP) has grown significantly in recent years. This has boosted sale-and-licensing transactions among large and small companies and among nonpracticing entities using various business models for monetizing IP assets.[2] Auctions—particularly for patents—are now more commonplace, providing valuable market mechanisms, market data through auction pricing, and opportunities for liquidity events.[3] In addition, some firms have contributed to the IP marketplace a greater level of depth and sophistication by offering products like patent-infringement insurance.[4] Marketplaces for other forms of IAs operate differently. When intangible assets, such as customer relations and brand loyalty, are part and parcel of the company’s ongoing value they drive acquisition activities. Likewise, the skill and intellectual capital embedded in a company’s workforce may be the ultimate acquisition goal in advanced technology-sector deals. Another monetization option for IAs is the granting of a security interest in a financial asset—an IA royalty stream or licensing revenue, for example—in exchange for capital. The standard method is through traditional debt financing, where the asset is pledged as collateral and the revenue stream is used to pay off the loan. The newer phenomenon of securitization—a variation on the
long-standing practice of securitizing mortgages and other consumer debt—may be
another viable way to extract value from IAs. One of the first and most famous
examples of IA securitization was for the music of David Bowie—known as “Bowie
Bonds”—when marketable securities were issued and backed by the royalty stream
generated by Uncertainty surrounding intangible asset valuation is the most significant obstacle to greater interest and activity in IA finance. Business valuation is seen as more art than science in many quarters. Valuing a patent portfolio or the trademarks for a brand, for instance, is all the more challenging because of the inherent uniqueness of IAs and concerns about transferability from the original company.[6] The following three valuation methods are the most widely accepted: · Market approach, which requires comparable market transactions · Cost approach, which assumes the expense for replacing or reproducing the entity and depreciation · Income approach, which attempts to determine the income of the assets, considering both expenses for utilizing the assets and the revenue generated.[7] In sale-and-licensing transactions, ultimate valuation is determined by the end result of the buyer–seller negotiations, whereby valuation methods merely inform the process and, in turn, the process informs the valuation analysis. The monetization mechanisms mentioned above created a marketplace that is providing real pricing data that are vital for valuations. Comparable transactions, or “comps,” are important market-price data points for valuation experts. Notwithstanding the uniqueness of IAs, these pricing mechanisms offer hard, quantitative evidence about the durability of IP as an asset class. Valuation plays a different role in debt financing, based on two considerations: 1) Present and future cash flow for the purpose of servicing the loan repayment plan 2) Value to cover the investment in the event of default. Use of some types of IA as collateral is especially problematic because, ultimately, a financial firm is concerned with the revenue-generating potential of the asset on which the firm is basing its investment in the company. This revenue generation must be able to be realized independently—even if partially from the company—if it is to be valuable in the event of default, which is of the utmost importance to the prospective creditor. Considering these two factors, IA can be divided into two categories for the purposes of valuations: explicit value and implicit value. Explicit value could be assigned to an IA due to present and future cash flow, such as a royalty revenue stream from a licensing agreement. Implicit value, on the other hand, is derived from the IA’s centrality or importance to a company, technology, or market—the monetary value realized from a prospective sale or license. Clearly, the explicit value is rather objective compared to the implicit value’s subjective or predictive nature. As a general rule, assets with explicit value tend to be those that can be borrowed against, whereas assets with implicit value tend to be targets for equity investments or hybrid debt–equity deals. Beyond these broad characterizations, there are countless
other methodologies and models employed by consulting firms, litigation
specialists, and companies.[8] In addition, the
International Valuation Standards Council (IVSC) is currently developing an
“International Valuation Guidance for the Valuation of Intangible Assets for
International Financial Reporting Standards ( For financial firms, valuation and other aspects of IA lending introduce higher levels of risk due to liquidity concerns, even with the existence of companies, such as IP Recovery, that specialize in IP bankruptcy sales.[10] Keith Bergelt and Edward Meintzer—former co-founders of IP Innovations Financial Services—explain that IP takes approximately six months to liquidate in the event of default, similar to fixed assets and in contrast to the three-month standard turnover for inventory and accounts receivable.[11] The
case of According
to CONSOR, an intangible assets consulting firm that studied the When The In a practical sense, valuation of IP assets is subject to the broader context for the appraisal, whether for a merger or acquisition, the refinancing of a company, or the evaluation of a distressed situation. Each of these situations provides a different backdrop for the valuation, complicating the process.[13] In cases where IAs are not counted strictly as collateral, they can be used as a credit-rating factor. Because many banks do not secure pure IA-backed loans, the bank will use the traditional credit-rating process of analyzing cash flow and accounts receivable. It might then use IAs as another factor in the credit rating or, perhaps, specify and include the IAs in the broader collateral package for a loan, such as second-lien loans and mezzanine debt. Generally, however, the traditional credit rating process subsumes intangibles, such as the quality of management, indirectly into the analysis. Intangible Asset Finance ModelsThe following sections outline the array of models for
equity-and-debt financing targeting intangible assets (IAs). Considering the
issues presented above, companies with considerable and valuable intangible
assets can utilize these vehicles to raise significant funds in the capital
markets.[*] IA-Focused Equity InvestmentLarge investment banks and
boutique private equity (PE) firms alike have begun raising and investing funds
targeted at intellectual property (IP) and other intangible assets. Broadly
defined, these firms are targeting the traditional venture capital space,
looking for promising early stage innovation and inventions. However, rather
than looking for entrepreneurs and start-up companies, these firms are looking
to invest in IP and IA for development and commercialization purposes, even
before start up. While funds and firms often differ in structure, these
enterprises work with companies to either buy the IP/IA or invest in the
company for commercialization of the IP/IA. Due to the private nature of
private equity deals, many details about this group of firms and funds have not
been disclosed. The large investment bank Deutsche Bank (DB), however, announced publicly that it is
currently managing three IP funds totaling more than 150 million euros invested
in IP assets. Partnering with IP
Bewertungs AG, DB has identified and purchased IP assets for further
legal and commercial refinement to be sold and/or licensed.[14] Another IA-focused firm, IgniteIP, is a “full-service IP
placement enterprise” that works with inventors, IP owners, and investors to
commercialize and/or license IP by connecting candidates with the large-scale
industry network.[15]
For example, IgniteIP worked with a company that developed a new mining
industry technology.[16] After
the inventors failed to develop new business around the technology, IgniteIP
invested in the company and then led the effort to commercialize it. IgniteIP
evaluated the mining industry market and developed an innovation licensing
model that met the needs of the mining industry clients and satisfied the
return-on-investment goals for the inventors and investors. IgniteIP’s model differs from the
traditional VC model in that it paid attention to IP development nearly
independent of the business itself. VCs are known for working with
entrepreneurs and start-up companies to manage the initial and growth stages,
often directly managing the company. IgniteIP’s model shares the VC model’s
emphasis on equity, but is unique in focusing on the underlying asset in the
venture. Blended Equity–Debt ModelsA number of financial firms employ the VC equity model for financing, yet its debt focus provides entrepreneurial, start-up companies another avenue for raising capital. Venture debt blends the early stage focus of the VCs with the lending competence of banks, while structuring deals that make this blended model worthwhile for the companies and investors alike. Firms such as Silicon Valley Bank, Square 1 Bank, and Sand Hill Capital are a few leading firms that offer, among other more traditional financing options, venture debt financing that includes proper treatment of intangible assets (IAs). In most venture debt cases, the investing firm establishes an interest rate on the debt, taking into account the viability of the company and the current funding structure, as well as the reputation of the company’s current funders. Interest rates can range from prime plus 1 percent to prime plus 5 percent, with loan terms varying from 24 months to 48 months. Additionally, the firm will likely require liens on all of a company’s assets. The deal will also include warrants in the company to buy shares at a fixed price.[17] There is another set of private equity (PE) firms that target investments in companies with a critical focus on IP and intangible assets. These firms are not necessarily targeting raw or undeveloped IP assets for the purpose of monetizing the IP itself through licensing. Rather, these firms look for early stage or start-up companies with integral IP assets for the companies’ intended markets. In essence, these firms screen their deals by looking for critical IP assets and the overall cash flow the companies generate. These models also often utilize a hybrid approach to equity investing, similar to the venture debt market. Altitude
Capital, a boutique PE firm with this model,
has invested in 16 companies since the firm was created in July 2005. It
invests in “portfolio companies that have valuable patents, trademarks/brands,
copyrights, royalty streams, trade secrets, and other intangible assets, which
will create a competitive advantage in creating value.”[18]
Altitude has structured a variety of transactions, providing common equity,
preferred stock, and subordinated or secured debt. One of Altitude’s portfolio
companies, Intrinsity, Inc.,
developed a key high-performance microprocessor technology—its proprietary Fast14
technology—that can embed Internet protocol cores to create “FastCores.” In
December 2007, Altitude invested $11 million in Intrinsity, using an
equity–debt combination of Class E Preferred Stock and Senior Secured Notes
with warrants.[19] Altitude employed a similar hybrid deal for an investment in
DeepNines Technologies
(DeepNines), a network security solutions provider. DeepNines technology is
secured by patented technology for a “unified threat management” appliance and
a “network access control solution.” In January 2007, Altitude invested $8
million in Senior Secured Notes with warrants. The secured notes are subject to
repayment from the company’s IP proceeds and are secured by all the company’s
assets. Altitude also received warrants for an undisclosed equity interest in
DeepNines, according to the arrangement. [20] Newlight Capital, another firm focused on IP venture debt
investments, partners with companies seeking debt alternatives to venture
capital or for cost-effective financing not readily accessible in the
traditional market. Newlight’s “proprietary structured debt instrument is
designed for earlier stage companies that own intellectual property with a
clear path to commercialization.”[21] Newlight’s model focuses on intellectual property because, the firm suggests, it is a traditionally undervalued component in venture debt, compared with accounts receivable, durable goods, inventory, etc. After Newlight values the IP, it issues a broad security package for a term loan with interest and warrants in the company. Newlight’s IP-focused mezzanine debt product allows companies unable to meet their capital goals through conventional debt or equity to secure an interest in the company’s IP portfolio that is subordinated to the rest of the debt structure. In exchange for the upfront financing, the firm receives interest and warrants equivalent to the risk it is assuming. Intangible Asset–Focused Debt InvestmentOn the opposite end of the spectrum, debt financing focused
on intangibles allows companies to structure deals without diluting equity
investors. These deals are secured by the assets of the company—for our
purposes, its intangible assets. The following cases articulate the pure
intangible asset–backed loan (IABL), the securitized IABL, and syndicated loan
structures with dedicated IP tranches. Intangible Asset–Backed Lending
Financial markets for asset-backed loans are already well developed and take many forms. Consumer loans, such as home mortgages and auto loans for individuals, are the staple of the credit and banking system. Inventory and equipment loans for businesses are available from either traditional banking sources or from specialized asset-based lenders. Specialized asset-based lending includes assets such as accounts receivable and extends from straightforward loans to complex lease-back arrangements. Similar to these transactions, intangible asset–backed loans
leverage a portfolio of IP or other intangible assets to secure a loan.[22] Use of intangibles as
lending collateral is rare but not unknown. There is a long history of such
financial transactions. The first trade secrets case in the For such loans, the interested financial firm values the IA (most often, the IA secured for an IABL has an explicit valuation) and then structures the loan secured by the company’s IA and/or a licensing agreement/royalty revenue stream tied to the IA (most commonly, an IP portfolio). Companies can use a single IA-backed loan. In such cases, only the IA and its revenue stream are used to secure the loan. In either case, companies can secure their IA in addition to a blanket lien against common collateral such as real estate or receivables. In the latter case, they may be able to receive additional capital by specifically securing an additional lien against the IA. The following is an example of an IABL, led by Paradox Capital, an investment firm
specializing in IP-based debt and equity in the middle market. Paradox has
closed a number of loans for technology, consumer products, and fashion
companies based on those companies’ intellectual property. Paradox Capital in August 2008 provided an IABL to Snapware Corporation, which specializes in storage and organization solutions for the home and kitchen with brands that include Snap ‘N Stack, Smart Store, mods, GlassLock, Airtight Canisters, and Snap ‘N Serve. The financing relationship between Paradox and Snapware grew out of an initial IP-based loan provided more than a year before the August deal. After the relationship proved successful, Paradox Capital partnered with New Stream Capital to close the IABL for Snapware, supported by the storage company’s strong and ongoing investments in brand and product design. Paradox has continued to fund Snapware with additional capital, helping the company grow.[24] The PE firm of New Stream Capital, based in ·
A $9.8 million loan to
a Berwick, ·
A $6.6 million term
loan to a ·
A $5 million term loan
to a Some firms specializing in IABLs will serve as a credit enhancement agent to a larger bank or firm that ultimately lends the funds. These firms might partner with investment and commercial banks, and even private equity firms, to secure a line of credit for the target company to provide the larger institution with additional protections to offset the complexity and uncertainty surrounding IA valuations. The innovative flat-panel display technology maker Cambridge Display Technology ( IPI financed a similar deal in 2004 for ATD Corporation, a Georgia-based company that supplies acoustic and thermal insulation products to the automatic appliance and barbecue industries. The entire $2 million loan by GMAC Commercial Finance was secured by the company’s patents, trademarks, and related licensing revenue. The IABL was additional and separate from the working capital loans secured by accounts receivable and inventory, with only the IABL piece covered by IPI’s credit enhancement guarantee.[28] Taking an example from the creative arts sector, Intangible Business, an IP financial services firm, structured a deal with Boosey & Hawkes to expand its business publishing the rights to the works of composers. Boosey needed capital to purchase additional rights, and Intangible Business agreed to provide the funding, which was secured by the rights Boosey already owned.[29] Another deal comes out of the food and beverage sector. Belgium-based KBC Business Capital financed an IABL loan for Burn Stewart Distillers Limited, which needed development capital to expand its international business marketing whiskey brands. In this case, the IP was used to enhance the original loan. KBC retained Intangible Business to value Burn’s intangible assets and inventory and was able to demonstrate the additional value of the brand assets when combined with the value of its real estate. Ultimately, KBC loaned Burn £31 million.[30] Securitizations in IABLThe securitized IABL is a slight variation on the form of IABL discussed above. Securitizations, as mentioned earlier, allow companies to grant a security interest in a particular revenue stream, whether current or prospective. In recent years, royalty financing arrangements, especially in the pharmaceutical and biotechnology sectors, are increasingly useful as sources of securitizations. These arrangements range from straightforward securities in royalty streams that are already cash-flow positive (“royalty interest”) to more complex and risky investments in prospective future revenues from products that are still in the premarket/precommercial stages (“revenue interest” or “synthetic royalty” transactions).[31] The “royalty interest” securitization allows a company to sell the rights to an investor for cash up front or to sell a percentage of the rights for cash up front while still retaining a partial right to future royalty revenue. Either way, the investor is attempting to purchase the royalty revenue stream at a discount from what it will pay over its life. The “revenue interest” securitization model follows the same structure but is simply executed earlier in the life of the patented or copyrighted entity—for the purposes of this definition, before the royalties have generated any revenue. Because the royalty has yet to generate revenue, the investing institution generally negotiates more favorable terms for itself due to the greater level of risk. Ultimately, the investor pays the rights’ holder for part or all of the prospective royalty revenue stream in exchange for the rights to future royalty pay days. According to an article in The Deal Magazine, the
number of royalty securitizations has grown dramatically in recent years. In
2000, there were two publicly announced deals— one royalty interest transaction
and one revenue interest transaction—totaling $145 million in investments.
Contrast that with the 2007–2008 period, when there were 27 publicly announced
transactions—19 royalty interest transactions, five revenue interest
transactions, and three hybrid transactions using multiple financing techniques
including royalty financing—totaling $3.3 billion. Leading firms in this field
include Capital Royalty LP, Cowen
Healthcare Royalty Partners, Both the royalty and revenue interest models allow a seller to use future cash flows from an asset or group of assets to receive upfront payments from investors in exchange for a security interest in the revenue. The seller wants to monetize the assets immediately and the investor accepts future payments based on partial or outright ownership of the royalty rights. The seller is able to hedge the risk of unpredictable future cash flow from the revenue by taking the money up front; however, the investor attempts to accurately model and predict the revenue and gain in that upside, with most investment firms modeling for a 20 percent internal rate of return. A “royalty interest” securitization can also serve as a debt vehicle because it is already revenue generating. This financing vehicle takes the securitization of the royalty revenue stream and collateralizes it for a loan rather than selling the rights. The appeal of this approach is in retaining the long-term profitability of the royalty revenues of a commercially successful invention. There are risks associated with borrowing that are inescapable, however: the interest payments on this mortgage of a blockbuster-to-be might be very large and unsustainable over time. Financial firms will be concerned with the maturity of the cash flow; the life of the patent and, subsequently, the terms of the revenue stream; the consistency of the revenue stream; liability for infringement; and other factors related to the risk and potential of the royalty revenue. At the same time, the firm will be concerned with the creditworthiness of the licensees because, ultimately, those companies are the ones whose commercial viability impacts the financial firm’s client’s ability to repay the debt.[32] In 1996, In 1997, Royalty
Pharma—a financial firm providing liquidity to royalty owners in
exchange for the risks and rewards associated with those royalty streams—purchased
the patents and royalty rights from In 2006, In May 2008, The story of In recent months, however, negative developments relating to
Despite As described earlier, financing transactions may involve assets where future cash flows are not yet derived from an existing license or royalty agreement. In this “revenue interest” model, the investor expects future commercialization, licensing, and product sales to generate revenue. The investor in this scenario is willing to step into the process early on to fund the commercialization process. In such cases, the investor may require an equity position as well. The investor might structure the agreement to ramp up funding when the company meets certain benchmarks, especially in healthcare, where there are well-established regulatory and commercial milestones. Due to the higher risks associated with revenue interest compared with royalty interest, companies and investors must be willing to negotiate terms that will work for the unique situation of the business, product, and capital. The increasingly robust marketplace for IP assets has only made the revenue interest model more viable because the increasing number of liquidation mechanisms (such as IP auctions) offers some measure of security to investors looking to fund the more speculative revenue interest securitizations.[39] For example, Dyax
Corporation, a biopharmaceutical technology company specializing in
therapeutics in oncology and inflammation, arranged $50 million in financing in
August 2008 through Cowen Healthcare Royalty Partners, with a 16 percent coupon
plus warrants in the company. Dyax used a traditional IABL, securing the loan
with the company’s licensing and funded research program (LFRP), the business
unit responsible for developing collaborative R&D partnerships to generate
licensing and new research. Dyax then refinanced the loan in March 2009—again
secured by the LFRP—and used the funds to repurchase an interest in the LFRP
that the company previously sold, while retaining nearly $15 million. Dyax
planned to use the second loan to fund the development and commercialization of
DX-88, one of its most promising products.[40] Dyax used the revenue
interest model to borrow against this IA for its prospective value, rather than
its royalty revenue. IP as
General Collateral
More generally, IP assets are being increasingly written into the contracts governing broad asset-backed loans. While intangibles have always been included in a blanket lien on all assets, it is becoming more commonplace for creditors to focus their analysis more directly on intangibles, either as a separate asset or as an integral part of overall company value. For example, Smithfield Foods company received a $1 billion revolving credit facility from JP Morgan that was secured by first-priority liens in the company’s and its U.S. subsidiaries’ cash, intellectual property, equity interests in the subsidiary guarantors, inventory, accounts receivable, and other personal property.[41] In other words, intangibles were treated like any other asset. Apart from an independent IABL,
larger companies have also arranged funding through a dedicated amount of
IA-secured debt within a broader lien structure, often a syndicated loan with
multiple financial institutions. These types of loans utilize IP as general
collateral. The
national toy retailer Toys ‘R’ Us is an
example of a larger company that leveraged its IP to secure debt. The company
had a tiered debt structure totaling $5.8 billion (as of May 2009) with secured
notes on various assets throughout the company and its subsidiaries, including
a real estate subsidiary that controls the company’s retail properties. Within
this complex debt arrangement is a secured-term loan based on the company’s
intellectual property and a second lien on accounts receivable and inventory.[42] The Toys ‘R’ Us example is a window into one of the barriers to
IP-backed lending—at least from the financial institutions’ vantage point. The
company is not viewed as highly credit worthy. A recent Fitch ratings report
articulates the poor recovery prospects—in a distressed scenario valuing the
company at $3.3 billion—for its various tranches of debt. The IP-secured term
loan is listed as less than 10 percent recoverable compared with real estate
debt, which is seen as 71 percent to 90 percent recoverable. The unsecured debt
was also listed at less than 10 percent.[43] Clearly
IP is still not seen as a highly recoverable asset; IP-secured loans are on par
with unsecured debt. On the other hand, using IP to secure part of its debt may
have given Toys ‘R’ Us access
to otherwise unavailable capital. Alternate
Model—
|