Bob Dylan has just put out his thirty-fifth studio album, Tempest. It features an angry track called ‘Early Roman Kings’ which, contrary to its title, has a deal of contemporary resonance.
Dylan growls about crooked bankers in their “shark skin suits/Bow ties and buttons and high-top boots…Meddlers and peddlers, they buy and they sell/They destroyed your city, they’ll destroy you as well”. Dylan it seems then is still, well into his 73rd year, sticking it to the man. And good on him for putting a bit of fire and spit into his new effort, his most unsettling album since 2009’s Christmas in the Heart.
Yet the times have a-changed, and now the music that once provided the soundtrack for the disillusioned counterculture of 1960s America may become a selling point for an unusual bond offering marketed to the wealthiest individuals in the US financial sector.
The $300m bond, which was to due be packaged by Goldman Sachs on behalf of Sesac, a privately held performing rights organisation from Nashville Tennessee, was to be backed by royalties from music by Dylan, as well as Neil Diamond and Canadian rock outfit Rush. Recently however, the scheme has encountered resistance, and its future is currently uncertain.
On the one hand, it’s easy to see why Dylan’s royalties would represent a lucrative investment. The prolific folk legend has certainly put out a lot of songs, which not only means for a lot of royalty-backed bonds, but also a lot of scope for bored journalists to convert track titles into laboured finance puns, such as ‘Tangled up in Annuity’, ‘Like a Rolling Interest Rate’, and bizarrely, ‘Blowin’ in the Bond Market’. I will of course refrain from such hack-work throughout…
On the other hand, so-called ‘esoteric’ asset-backed securities haven’t the most illustrious history. In the late 1990s, David Bowie introduced a security, worth over £30m, backed by the royalties from a catalogue of classics from the heyday of Ziggy Stardust and Aladdin Sane. Bowie was something of a pioneer in this, the benefit for him lying in his being able to take a lump-sum advance on royalties which otherwise would have unfurled their value only over a number of years.
For investors however, the venture was about as disastrous as Major Tom’s, with the bonds falling to Earth when ratings agency Moody’s downgraded them repeatedly from A3, the seventh highest rating, to only one level above ‘junk’. Revenues missed their estimates by several millions. That’s pretty far out.
Bowie, ever the trendsetter, actually started a craze that resulted in a hotbed of ‘securitization’ in the financial sector, most infamously in the subprime mortgage market. Like Bowie, banks looked for an up-front payment from their debt, selling securities all too often backed by subprime mortgages – loans handed out indiscriminately to customers highly likely to default. Notoriously, when these sham loans were exposed, banks made billions in losses, major financial institutions such as Bear Stearns and Lehman Brothers ceased to exist, and the world went into a credit meltdown. So there you go, the Thin White Duke caused the credit crunch.
In the pre-crisis years, esoteric securities were backed by all kinds of weird and wonderful assets. In 2007, one ABS deal pooled together cash flows generated by shares of stallion syndicates.. In the competitive world of horse racing, a thoroughbred with a winning record can command astonishing breeding fees, or ‘stud fees’. American thoroughbred Storm Cat famously commanded a $500,000 stud fee, making for a horse so valuable that he was placed under the protection of a twenty-four-hour armed guard. Theoretically, there is a predictable cashflow associated with a thoroughbred siring offspring, and therefore racehorse semen is not an uncommon asset with which to bolster securities. Now there’s an investment with sticking power.
Today, despite an understandable caution about esoteric securities in the wake of the credit crunch, investors are dabbling in a range of unusual assets, from publishing rights to pharmaceutical patents. In March this year, Domino’s Pizza sold $1.6bn of bonds offering hungry investors a slice of future restaurant franchise revenues. Last year, Miramax Film completed the sale of $550 million in debt backed by licensing and distribution revenues of films in its library, such as Pulp Fiction, The English Patient and Good Will Hunting.
The interminable hunt for high yields has inspired wide-ranging creativity on the part of investment banks in this area – the ‘miscellaneous’ section of asset-backed securities data compiled by JP Morgan makes up a full 5% of its $128bn asset total this year. According to data from Barclays, there has been $13.6bn worth of issuance of esoteric ABS so far this year, compared with $13bn for the whole of 2011.
The resurgence of royalty-backed bonds has much to do with the advances in technology we’ve seen since Bowie bonds rocketed onto the scene almost twenty years ago. With a proliferation of dedicated digital-TV channels, the popularity of iTunes and the prevalence of online ads, sales volumes promise to be greater this time around, even in spite of the potential disruptions of music piracy. It is also possible that, after the financial meltdown, way hedge-fund managers would be keen to hold bonds that capitalize on intellectual property and therefore aren’t quite so closely tied to the vicissitudes of broader market forces. Whether investors will see an encore performance for these derivatives in the near future however is yet to be seen.
Sooner or later, one of us must know.
