Morgan Stanley unveils $250m securitisation

By Jennifer Hughes in London

Published: July 13 2009 00:12 | Last updated: July 13 2009 00:12

Morgan Stanley has launched a new intellectual property securitisation in the latest sign of life for structured products and a revival of investor interest in even the most cutting-edge corners of the market.

The bank has launched a $250m deal for Vertex Pharmaceuticals, a US biotech company that would see investors repaid from contractual milestone payments on a drug still in development.

Most observers expect these particular deals to remain an exotic area of the markets but say that their presence is another sign that the basic principles of asset-backed borrowing are still alive.

The return of securitisation, one of the first sectors of the markets to seize up in the summer of 2007, is considered crucial to the economic recovery because of its pivotal role in allowing banks to lend more by helping them transfer some of the risks off their books.

Last month Tesco, the UK supermarket giant, raised £430m ($697m) in the first commercial mortgage-backed bond since the credit crisis began.

Deals based on so-called intangible assets such as intellectual property are similar to straightforward securitisations such as the Tesco deal in that the issuer is borrowing against ring-fenced cash flows from specified assets. But the deals are very esoteric since each depends on the exact assets involved and the reliability of those particular cash flows.

Musicians have used the structure to borrow against royalty payments from their back catalogues while Walt Disney has borrowed against its theme park gate receipts. Before the financial crisis, private equity firms were increasingly securitising intangibles to help fund buy-outs including those of Hertz and Dunkin Donuts.

Morgan Stanley bankers have been quietly working on similar drug-based deals since 2004. This will be the 18th. The team even managed five deals in 2008 but they were all completed before Lehman Brothers’ collapse rocked the markets.

“We think other holders of royalties will start to avail themselves of this technology and the rationale,” said Thomas Cahill, co-head of Morgan Stanley’s structured products group. “The products are bespoke, but we believe there are enough investors prepared to do their own homework for the deals to become more common.”

Companies like the deals because they get to keep the assets – and any upside from other sales and licence agreements – and do not have to dilute their equity. Nor do they have to bear the risk if the drug fails because the deal is structured in a special purpose vehicle with no recourse to the actual company.

For investors the attraction is high yields – the deals often carry double-digit coupons – and the chance to own assets that are not closely correlated with other asset classes or the wider economic outlook.