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April 13, 2006
Intangibles as loan collateral
Many people know that pop-star Michael Jackson owns many of the Beatles songs (just as Paul McCartney owns many of the old stand-bys -- like "Peggy Sue" and "Blue Suede Shoes" -- through MPL Communications.)
What most people may not know is that Jackson has used those songs as collateral on his loans. Now, he is one the verge of losing that collateral as part of his debt restructuring. A story in the New York Times states:
Mr. Jackson used his stake in the song catalog as part of the collateral for about $270 million in loans from Bank of America. The bank sold the loans last year to Fortress Investment Group, a New York-based investment company that buys distressed debt. The entire catalog, of which Mr. Jackson owns 50 percent, has been valued around $1 billion, the people briefed said.
As part of the new agreement, Fortress has agreed to provide a new $300 million loan and reduce the interest payments Mr. Jackson must make.
The deal is actually more complicated, since Jackson does not own the songs outright. He owns 50% of Sony/ATV Music Publishing LLC; Sony owns the other 50%. According to the Times:
Sony has a longstanding interest in keeping Mr. Jackson solvent. If Fortress had moved to foreclose on Mr. Jackson, he might have been forced into bankruptcy protection, where his stake in the publishing company could be put up for auction.In negotiating the deal, Sony seeks to avoid the prospect that another bidder could gain ownership of the stake, which the company has long hoped to control.
So Sony apparently gets an option on half of Jackson's half - which would give it control over the song rights.
All of this may seem a sidelight to the story of Mr. Jackson's life. But there are larger implications. Intangible assets are being used more and more as backstops for financial deals. This trend started to take off when singer/songwriter David Bowie securitized his songs. As Billboard relates in their 2001 story -
Bowie Bonds: One-Off Or a Sound Vision for the Future:
The sale of those Bowie Bonds in 1997 gave Bowie $55 million upfront; in exchange, the buyer of the bonds had the right to receive the future revenue generated by Bowie's catalog until the principal plus 8% interest was repaid.
Since then the monetization of intangible assets has continued at full speed - especially for traditional IP: patents and copyrighted material. But even franchise agreements of major brand names can be securitized. For example, UCC Capital Corporation, for example, has specialized in structuring financial packages backed by franchise fee revenues - and has set up a new revolving credit fund for this purpose.
As such deals grow, a number of public policy question arise, such as how these intangibles should be valued and accounted for, how federal and state security regulations should be applied to these assets and what is the right level of protection of these assets as intellectual property. To help answer these questions, Athena Alliance has an ongoing project on the monetization of intangible assets. We hope to publish our report later this year.
Posted by Ken Jarboe at April 13, 2006 11:32 AM
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