David Bowie, who died from cancer recently at the age of 69, will always be primarily remembered for his music, but he also made history as a pioneer in the world of finance. David Bowie is credited as the first musician to securitize the royalties from his music catalog into a 10-year note referred to as “Bowie bonds.”
Securitization is the sale of bonds backed by the future revenue of an asset. It allows the owner of an expected future stream of cash to get the money today. These bonds can be backed by revenue from items such as movie deals, credit card receivables, auto loan payments, franchise fees and real estate time shares. The names behind securitized bonds may be familiar to consumers, but a shift in the economy or an industry change may threaten the interest and principal repayments of the bonds. In a low interest rate environment, where 10-year bonds yield 2%, yields on securitized bonds can top 5%.
In 1997, David Bowie partnered with banker David Pullman to package and securitize the rights to his future royalties. Bowie had acquired the rights to his music and struck a deal with EMI for the 25 albums and nearly 300 songs he had recorded between 1969 and 1990. The deal gave EMI the rights to release these albums and any related unreleased recordings over the next 15 years. Rather than collecting his royalty payments over the life of the contract, Bowie decided to sell the rights to the royalties. In a Bloomberg article, David Pullman is quoted as saying “I wish all of our clients were as innovative as David Bowie. David’s ability to embrace new ideas is testament to his position as a living rock legend.”
The Bowie bond was sold for $55 million in a private transaction to the Prudential Insurance Co. as a 10-year note that carried a 7.9% coupon. At maturity, the rights of the music would revert back to David Bowie. At the time of sale, the recording industry was performing strongly and consumers were happy to pay top dollar for CDs. The bonds were rated A3, investment grade, by Moody’s Investors Service when they were issued.
Fast-forward a few years and the music industry hit a rough patch as music-sharing services cut into CD sales and music sales transitioned into digital sales through services such as iTunes. Moody’s placed the Bowie bonds under review in 2003 and downgraded them next year to Baa3, one notch above junk status. This downgrade was prompted by lower-than-expected revenue “due to weakness in sales for recorded music.” The bonds never defaulted and ended up paying off after 10 years.
The Bowie bond deal created a template for securitizations linked to all types of assets often termed “esoteric” asset-backed securities. Musicians and bands such as James Brown and Iron Maiden issued bonds. Movie studios sought to securitize their intellectual property. DreamWorks raised a billion dollars by securitization of future revenue from its films. But as noted in this June 2012 AAII Journal bond investing article by Stan and Hildy Richelson, investors should be wary of esoteric securitized bonds. Investors in Bowie bonds were made whole, but too often when individuals reach for higher yields they don’t fully understand the investment risks and suffer loses when the environment changes.
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