Interest in the securitization of music royalties rose in the late 1990s and early 2000s, as David Bowie became famous in the financing world when he struck a $55 million deal to issue the first asset securitization backed by future music royalty receivables and other intellectual property rights in 1997. Since then, other famous musicians across various musical genres, including Rod Stewart and Iron Maiden, have followed suit in securitizing their respective royalty streams.
Royalty-backed securitization in the music industry involves securitizing cash flow streams generated from copyright interests relating to a catalogue of songs. The asset pool being securitized may include an artist’s “bundle of rights” in respect of such catalogue including publishing royalties, sales of albums and merchandise.
Similar to other structured finance transactions, the right to the royalties and licensing income are sold by the originator to a bankruptcy-remote special purpose vehicle (“SPV”) for the duration of an issuance. Ensuring that there is a “true sale” to the SPV is crucial in guaranteeing that, in the event that the originator goes bankrupt, the asset (i.e. the music catalogue) is protected from the reach of creditors.[1] Additionally, an SPV must provide a first priority perfected security interest in its asset (comprised of the securitized music catalogue and other related assets) for the benefit of the holders of the royalty-backed securities.
Music Ownership
Who owns the rights to the music and related catalogue of songs and who can assign an interest in the rights to such music is a central question in music securitization. Ownership in music is a “bundle of rights,” which can be exploited in multiple different ways by various parties. Therefore, competing ownership rights and interests in musical works can complicate music securitization transactions.
Under Canada’s Copyright Act, the makers of a sound recording have a copyright in the sound recording in question.[2] Typically, record labels will enter into recording agreements with artists that recognize the record label as the owner of the musical catalogue of the artist. These same agreements (with the corresponding recognition of ownership of the copyright ownership interest) can be made or offered to music producers, sound engineers, back up musicians, and other featured artists in order to retain or recognize copyright ownership of the musical work. However, if any one of the aforementioned parties retains an ownership interest in their portion of a music catalogue (rather than the songwriter or author of the musical work), the securitization of such musical works by such songwriter or music author becomes risky and/or untenable.
Accordingly, financing parties and investors involved in royalty-backed securitization transactions must ensure that the party holding themselves out as the “originator” of a specific music catalogue has all the requisite copyrights in place, thus securing the rights to all of the royalties payable with respect to a specific musical catalogue. Additionally, for the securitization of a music catalogue to be effective, the legal right to exploit the copyright must not terminate by virtue of the application of relevant law or by the terms of any contractual arrangement before the maturity of the securitization transaction and the instruments issued in connection therewith.
Bowie Bonds
As noted above, one of the first artists to capitalize on the securitization of their music catalogue was David Bowie. Due to the fact that Bowie’s music catalogue was consumed regularly, thus generating a regular, lengthy and predictable income stream, it seemed to satisfy all the criteria of an asset ripe for securitization. The royalty-backed securities in the Bowie transaction, issued as bonds, had a 10-year maturity, a Moody’s A3 rating, and bore interest at a rate of 7.9%. The underlying assets in question were the royalties payable from 287 songs that comprised the 25 albums that David Bowie had written and recorded prior to 1990. As such, there was predictable cash flow with a measurable history dating back three decades.
What can be gleaned from the characteristics of David Bowie’s music as a successful asset securitization is that “one hit wonders” would be a poor choice for securitization. A catalogue with a proven track record of steady and positive popularity over several years is more secure as an asset for securitization than a music catalogue propped up by one hit wonders.
Music catalogue securitization deals have soared in recent years, with $1.9 billion worth of music catalogue deals announced in 2020, climbing to $5.3 billion in 2021.[3] In 2022, KKR Credit Advisors raised $732 million of asset backed securities collateralized by publishing and sound recording royalties. Given such trend, it wouldn’t be surprising to see more and more creative transactions involving intellectual property securitizations both inside and beyond the music royalty sector in the coming years.
Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Structured Finance and Securitization team.
[1] Nicole Chu, “Bowie Bonds: A key to Unlocking, the Wealth of Intellectual Property” (1998) Article 5 Hastings Communications and Entertainment Law Journal 469
[2]Copyright Act RSC, 1985, c C-42 s 18(1).
[3] Anna Ncolaou and Kaye Wiggins, “How Wall Street stormed the music business” (September 13, 2022) online: <https://www.ft.com/content/e879f856-3ec3-4bd7-b564-ada5b590e3ef>.
