“My entire career, I’ve only really worked with the same subject matter. The trousers may change, but the actual words and subjects I’ve always chosen to write with are things to do with isolation, abandonment, fear and anxiety, all of the high points of one’s life.”
11 January 2016 – “Blackstar”, released last Friday on his birthday (8 January), did not, as was usual, feature a picture of him on the album cover, but rather a black star. A dark work, its symbolism suggests he was saying goodbye, particularly the track Lazarus and the video for Blackstar, which opens with the image of a dead spaceman.
My wife and he have the same birthday. She has his every album and he was her favorite musical artist. We had the opportunity to see him in concert four times, twice in the U.S and twice in Europe. Throughout the 1970s, Bowie was a trailblazer of musical trends and pop fashion. Having been a late-60s mime and cabaret entertainer, he evolved into a singer-songwriter, and a pioneer of glam-rock, then veered into what he called “plastic soul”, before moving to Berlin to create innovative electronic music.
In subsequent decades his influence became less pervasive, but he remained creatively restless and constantly innovative across a variety of media. His capacity for mixing brilliant changes of sound and image underpinned by a genuine intellectual curiosity is rivaled by few in pop history.
“Blackstar” was proof that this curiosity had not diminished in his later career. He was still capable of springing surprises. The album showed that his gift for making dramatic statements as well as challenging, disturbing music had not deserted him.
Bowie had always enjoyed blurring the line between fact and fiction. He once admitted that telling lies was part of his job description. And don’t look for answers in his lyrics, he said. They are as ambiguous as he was.
“Heroes”
And you, you will be queen
Though nothing will drive them away
We can beat them, just for one day
We can be Heroes, just for one day
And you, you can be mean
And I, I’ll drink all the time
‘Cause we’re lovers, and that is a fact
Yes we’re lovers, and that is that
Though nothing, will keep us together
We could steal time,
just for one day
We can be Heroes, for ever and ever
What d’you say?
I, I wish you could swim
Like the dolphins, like dolphins can swim
Though nothing,
nothing will keep us together
We can beat them, for ever and ever
Oh we can be Heroes,
just for one day
I, I will be king
And you, you will be queen
Though nothing will drive them away
We can be Heroes, just for one day
We can be us, just for one day
I, I can remember (I remember)
Standing, by the wall (by the wall)
And the guns shot above our heads
(over our heads)
And we kissed,
as though nothing could fall
(nothing could fall)
And the shame was on the other side
Oh we can beat them, for ever and ever
Then we could be Heroes,
just for one day
We can be Heroes
We can be Heroes
We can be Heroes
Just for one day
We can be Heroes
We’re nothing, and nothing will help us
Maybe we’re lying,
then you better not stay
But we could be safer,
just for one day
Oh-oh-oh-ohh, oh-oh-oh-ohh,
just for one day
He also had an impact on my professional life.
When I was more involved in the practice of intellectual property law in the 1990s, I worked a lot in music intellectual property securitizations. Intellectual property (IP) assets can be monetized because IP offers a variety of financing and economic opportunities to the owners. IP can be sold, licensed, used for collateral or transformed into securities. Like other valuable assets, IP can be recognized as financial assets because IP owners can achieve future cash flow streams. As a cash flow generating asset, it is possible to set up tools and financial instruments for IPs via securitization. Securitization had become a popular technique to raise capital and to obtain liquidity in exchange for the transfer of certain assets.
And even back then, the power of technology had people talking about how developments had transformed the service sector of the advanced economies, including the provision of telecommunications, information processing, financial transactions, education, advertising and entertainment. In as much as these services were apt to use the same technological platforms and networks (such as the Internet today), analysts were predicting the imminent “convergence” of previously distinct industries into a “multimedia industrial complex”.
And just think of the timeline: the invention of the microprocessor (Intel 1971), the introduction of the personal computer (Apple II 1977) and the communication technologies associated with the Pentagon sponsored network ARPA (1969), the internet protocol (1974), the world wide web (CERN 1989) and the first mass-market browser (Netscape 1994).
The finance folks were not far away. “Celebrity bonds” were born, commercial debt securities issued by a holder of fame-based intellectual property rights to receive money upfront from investors on behalf of the bond issuer and their celebrity clients in exchange for assigning investors the right to collect future royalty monies to the works covered by the intellectual property rights listed in the bond. While a celebrity bond can cover any work of art whose future royalties are based in part on a widespread reputation of the creator of the work, celebrity bonds were often music-based celebrity bonds.
And just as he blazed a trail through the world of rock’n’roll, David Bowie’s dalliance with the stock market gave the world something it had never seen before — pop bonds. In 1997 he sold $55m of “Bowie Bonds”, asset-backed securities that were backed by the current and future revenues of the 25 albums he recorded before 1990.
How it worked
Rather than getting steady income from the revenues of his back catalog — including records such as The Rise and Fall of Ziggy Stardust and the Spiders from Mars and Let’s Dance — the bonds allowed Bowie to borrow more money up front. This was possible because, unlike many acts at the time, Bowie owned the rights to all of his songs.
“Bowie Bonds” were pioneered by rock and roll investment banker David Pullman. The bonds were bought for US$55 million by the Prudential Insurance Company of America. The bonds paid an interest rate of 7.9% and had an average life of ten years, a higher rate of return than a 10-year Treasury note (at the time, 6.37%). Royalties from the 25 albums generated the cash flow that secured the bonds’ interest payments. Prudential also received guarantees from Bowie’s label, EMI Records, which had recently signed a $30m deal with Bowie.
By forfeiting ten years worth of royalties, Bowie was able to receive the payment of US$55 million up front. Bowie used this income to buy songs owned by his former manager. Bowie’s combined catalog of albums covered by this agreement sold more than 1 million copies annually at the time of the agreement. However, by March 2004, Moody’s Investors Service lowered the bonds from an A3 rating (the seventh highest rating) to Baa3, one notch above junk status. The downgrade was prompted by lower-than-expected revenue “due to weakness in sales for recorded music” and that an unnamed company guaranteed the issue.
The Bowie Bond issuance was perhaps the first instance of intellectual property rights securitization, a financial practice of pooling various types of contractual debt such as residential mortgages, commercial mortgages, auto loans or credit card debt obligations and selling said consolidated debt as bonds, pass-through securities, or Collateralized mortgage obligation (CMOs), to various investors.
The securitization of the collections of other artists soon followed. The Bowie deal was followed by the “Motown transaction” in June 1998. The Motown transaction, which was three separate but nearly identical issuances, securitized the writer’s share of publishing rights owned by the songwriting trio of Edward Holland, Brian Holland and Lamont Dozier. Holland, Holland and Dozier are responsible for writing 70 Billboard hits, including many classic Motown songs of the 1960s and 1970s such as “Baby Love” and “Stop In The Name Of Love.”
And that was followed by the securitization of the James Brown music catalog. The notes were secured by certain intellectual property rights to approximately 750 songs created by James Brown. During his career James Brown amassed a total of 98 entries on the Billboard’s top 40 R&B Chart, with 19 of his songs reaching No. 1.
Apple
The 2005 success of Apple’s iTunes and other legal online music retailers has led to a renewed interest in celebrity bonds. However, a 2011 offering by Goldman Sachs for bonds based on, among others, Bob Dylan and Neil Diamond, was delayed and ultimately canceled due to lack of investor interest.
Oh, and the law suits …
In the late 1990s, Pullman unsuccessfully sued former business partners, who began engaging in the royalty bond business, for misappropriated what Pullman believed was his trade secrets in this area. Also, as of 2012, Pullman and artist quick-cash competitor Parviz Omidvar have filed at least 11 lawsuits and countersuits against one another related to songwriter clients, even though Pullman’s efforts mostly were towards complex financial deals and Omidvar’s efforts have been more akin to a pawnbroker that offers much needed secured loans to artists, with items of the artist’s intellectual property used ascollateral and unwritten expectation that the commercial note be paid off within weeks.
NOTE: in 2012 Pullman began assuming the risk for the stream of future royalties by purchasing royalties outright from artists who are looking to sell instead of packaging them for others to buy.
And it is a complicated evalulation process: cash flow and valuation analysis
Duff & Phelps were my “go to” chaps in this work … and I still work with them … so here are a few notes they passed on:
1. The noteholders of the securitization have three sources of repayment: the cash flows generated from the copyrights (royalty income), the liquidation proceeds from the sale of the copyrights, and any credit enhancement in the transaction.
2. The first two sources of repayment require an analysis of both the cash flow-generating ability of the copyrights and their recovery values if liquidation is required. The assets must display significant revenue-generating history in order to be securitizable. The cash flows should show earning stability over a number of years and ideally exhibit an upward trend. In a typical music royalty transaction, debt will have to be serviced for a term of 10-20 years.
3. Cash flows cannot be coming from “one hit wonders” that will fall off after only a few years. You need to look at the historical revenue generating ability of the assets to develop a base case assumption. You then create different cash flow scenarios for the transaction. For example, if the historical numbers reveal that earnings have been very stable over a number of years, we might assume 0% growth in the revenues over the life of the transaction. Should the historical cash flows show signs of variability, DCR might stress these numbers more heavily by implementing a negative growth assumption.
4. If the annual cash flows are inadequate to repay the bonds, then the noteholders will look toward the recovery proceeds from the liquidation of the music catalog.
5. A portfolio is valued by applying a multiple to its most recent earnings or an average of the last five years’ earnings.
6. We use the aid of an independent appraisal to understand the music portfolio’s value to potential buyers as well as to learn how the portfolio might be valued in the open market. On the other hand, we recognize that a liquidation mechanism is only necessary if the music catalog is generating inadequate revenues to amortize the bonds in a timely fashion and that the liquidation process might occur in less than ideal circumstances.
7. Therefore, we are concerned with how much the portfolio is worth on day one of the securitization, as well as its value during certain periods of the transaction.
What are Bowie Bonds worth today?
Well, as noted, Bowie bonds, when issued, had a face value of $1,000 with an interest rate of 7.9% and a maturity of 10 years. They were also self-liquidating bonds, that is, the principal declined each year. The 10-year term expired in 2007. The bonds have been retired. Bowie once again became the sole owner of his music and its royalties.
Ratings agency Moody’s had initially assigned the “Bowie Bond” an investment grade rating, saying it was subject to low risk of default. Moody’s said it was the first time it had rated a music royalty deal. But as online music sharing services turned the industry on its head, the investment soured.
Moody’s warned that revenue from Bowie’s albums was lower than expected due to “weakness in sales for recorded music.” It downgraded the bonds to near junk status in March 2004.
But according to my contact at Duff & Phelps, the bonds never defaulted. The value of the assets of Bowie’s catalog, publishing and recording masters was far in excess of the outstanding balance of the bonds. This type of deal was only ever appropriate for legends with big catalogs.
For an excellent law review article on “Bowie Bonds” and the details behind the securitization of intellectual property click here.