Building "Bowie Bond" Value through I/P Securitisation

Keith W. Medansky and Alan S. Dalinka write in a January 27, 2005 article that "IP securitisation remains a valid financing technique which allows rights holders to obtain the financial benefits of a present lump sum in exchange for the right to receive royalties from their works over the long term." They describe the case of musician David Bowie who, seven years ago, wanted to buy out his manager's minority interest in his music catalogue. Bowie reportedly had a regular cash flow of more than $1 million per year from ownership rights in the copyrights. So, rather than entering into a new, traditional distribution agreement at the expiration of his existing recording and distribution agreement, his attorney David Pullman devised "Bowie bonds" to meet Bowie's need for upfront cash.

The assets that Bowie sold to the Secial Purpose Vehicle issuing the securities included the right to royalty payments from 25 of his pre-1990 albums. Bowie's record distributor, EMI, also provided certain credit enhancements resulting in the bonds receiving a triple A investment grade rating by Moody's Investors Services. Prudential Insurance Company purchased the bonds, netting US$55 million for Bowie:

"In a debt offering of this kind, the underlying copyrights would be used to secure the bonds. If the SPV defaults on its payment obligations to bondholders, the copyrights are permanently transferred to the bondholders. Until the event of default, of course, the copyright owner would retain the copyrights subject to a security interest held by the bondholders. After the bond obligations are met, the copyright owner holds the copyrights free of the security interest (just as a homeowner that has paid mortgage debt in full owns a home free of the mortgage).

"The security interest in the copyrights would be perfected to allow the bondholders' claims to take precedence over most unsecured claims. The procedure used to perfect security interests in copyrights in the United States is the subject of some debate. Article 9 of the Uniform Commercial Code (UCC) does not mention copyrights and there is some question as to whether collateral interests in copyrights should be perfected by filing a UCC-1 financing statement in the appropriate states as general intangibles under the UCC or by recording a collateral assignment in the Copyright Office. Although recent case law suggests that security interests in copyrights can only be perfected in the Copyright Office, out of an abundance of caution, most careful lenders perfect security interests in all IP rights (patents, copyrights and trademarks) at the state and federal level (Patent Office, Copyright Office and Trademark Office, as the case may be)."