Intellectual property trade stirs up interest

By Jennifer Hughes

Published: July 13 2009 02:22 | Last updated: July 13 2009 02:22

From Dwarfs to David Bowie via Captain America, deals backed by intellectual property have always been the exotic little brother to the enormous securitisation market.

But signs of renewed interest in the bespoke deals could be the latest signal that the wider market is waking up once more.

In the years before the credit crunch, securitising intangible assets, of which intellectual property is one example, were regularly touted as the next big business. Companies around the world could unlock vast wealth trapped in the balance sheets because, said bankers, neither investors nor executives were properly valuing the cash flows from these assets.

Like other securitisations, the deals are based on collateral that produce cash flows to repay the debt. The intangibles market has, however, remained bespoke since the underlying assets are unique to each company and cannot be standardised.

Other intangibles to be securitised range from the brands and song royalties to patents and franchise agreements.

Walt Disney did one of the first deals in 1997, borrowing against future theme park revenue through a structure its bankers named Dated Widely Auctioned Royalty Financings, or Dwarfs.

That year David Bowie became the first musician to tap the trend with a $55m deal backed by his own back catalogue.

More exotic deals followed thick and fast. Private equity houses part funded buy-outs by securitising receivables while film producers, including Marvel, the owner of comic book heroes such as Captain America, financed their films via the revenues from future projects.

The deals, however, died as the mainstream asset-backed markets were rocked by the drying up of the short-term money markets that had funded the buying of so much ABS paper. But bankers reckon there is a returning appetite for bespoke deals such as the Vertex one launched last week.

“Essentially the investor is arbitraging a lack of information of the inherent value of royalty cash flows,” said Michael Fusco, manager of the practice at Morgan Stanley arranging the deal.

But IP deals are not for everyone.

“We would need an awful lot of convincing to get involved,” said Jim Irvine, head of structured products at Henderson Global Investors. “They’re very illiquid and can be fraught with all sorts of legal problems. It always was a very niche corner of the market and I think it will stay that way.”

Henderson has, however, just opened a new asset-backed opportunity fund to take advantage of the weak prices in the mainstream ABS markets.

“We think the market is depressed, not distressed,” he said. The fund will, however, lock up investors’ funds for five years in a bid to solve the short-term funding issues that caused the market to convulse in 2007.

That confidence in a recovery is echoed by Moody’s Investor Services, which warns that a full reopening is still some way off.

Frédéric Drevon, head of Moody’s Europe, Middle East and Africa business, said: “There’s a real question around what is the alternative to this incredibly large industry.

“If securitisation isn’t a solution for banks to diversify risk and provide more credit, then what’s the cost to the economy as a whole?”