‘Bowie bonds’ are are back: Northleaf uses Spirit Music Group assets to raise $303.8m offering

Tim McGraw sold his master rights to Spirit Music Group in 2020

Two months ago, MBW told you that financial bonds were once again about to become a big noise in the music industry. Now, just in time for the end of the year, that prediction has started coming true.

Private equity company Northleaf Capital has announced it is raising $303.8 million by selling Asset-Backed Securities (ABS) that are supported by music rights – including songs created by Pete Townshend for The Who, and by country star Tim McGraw.

According to Bloomberg, the securities will be supported by both publishing and sound recording rights, as well as other income streams, across a total of 52,729 songs.

Those songs make up a chunk of the catalog of Spirit Music Group; Spirit owns a total portfolio of more than 100,000 music assets.

Toronto-based Northleaf took ownership of an interest in certain music catalogs at Spirit earlier this year in a $500 million deal.

Northleaf was joined by co-investor Caisse de dépôt et placement du Québec (CDPQ) in that transaction, which was struck with Spirit parent Lyric Capital, run by Jon Singer.

The new bonds offering is being led by Guggenheim Securities.

As MBW explained in October, bonds act a bit like loans, but with a group of investors handing a company money, rather than said company raising that money via bank debt.

When everything goes well, these investors then make their money back (plus interest) via income over a number of years generated by an underlying asset (in this case, music rights).

To raise investor interest and confidence in bond offerings, bonds are ‘rated’ by financial institutions that include the likes of Moody’s, Standard & Poor’s, and Fitch.

Bond sellers are looking for an ‘A’ rating or above; a much lower rating will result in a something being labelled a ‘junk’ bond.

In the case of the Northleaf/Spirit bonds, Bloomberg reports, the Kroll Bond Rating Agency is expected to grant the all-important ‘A’ rating.

In short, that’s because – thanks to streaming – the reliability of royalty income for prestige catalog music assets has never been more predictable.

As Kroll puts it in a report: “Consumption is increasing at a subscriber level and the entire music industry is growing as the number of users increase as well as the frequency at which they stream.”

Northleaf says the money raised from its bond issue will be used to “repay [our] existing financing, pay transaction fees and expenses, and fund transaction accounts”.

Music’s most famous flirtation with the world of financial bonds was a bumpy one.

In a pioneering move, David Bowie launched ‘Bowie Bonds’ in the late 1990s, under which the artist (alongside David Pullman) securitized royalty streams from his catalog.

Those bonds started life with a stellar rating, but in 2004 – partly in response to fears over the growing threat of piracy to the music industry – Moody’s downgraded the Bowie bonds from an A3 rating to Baa3, a damning move which Investopedia calls “one notch above junk status”.

Ultimately, the buyers who spent $55 million on Bowie’s bonds got their money back, plus their agreed rate of interest.

Despite the likes of James Brown and the Isley Brothers followed Bowie in launching bonds, this story left music asset-backed bonds as unpopular in financial circles.

That narrative has now changed.

If the Northleaf bonds hold their ‘A’ rating and deliver the returns that are expected, watch for others in the music industry to swiftly follow suit.Music Business Worldwide