“Mark my words, we’re going to see a large financial entity buy a massive catalog of rights, then they’re going to split that catalog up into loads of bonds, and sell those bonds on to investors – and crucially, they’re going to be able to get a good rating for them.”
That’s what MBW told you in the first half of October last year. And that’s precisely what’s just played out.
Now, KKR is indeed securitizing that catalog into bonds, and seeking a nice rating for them.
According to Bloomberg, KKR Credit Advisors is using a catalog of 65,000 songs – including hits from The Weeknd, Stevie Nicks, and Childish Gambino – to sell more than $732 million of asset-backed securities supported by publishing and sound recording royalties.
That’s according to a presale report from Kroll Bond Rating Agency, which also reveals that Kroll expects to give the deal a grade of ‘A’, the sixth-highest possible rating.
Summing up its rating process, Kroll said that future growth in streaming could increase cash flows for the assets, but that it also factored in a danger that certain songwriters could, under federal US law, recapture the rights to their compositions earlier than anticipated.
The bonds offering is being led by Credit Suisse and KKR.
As MBW has written previously, the most memorable pioneer of bonds in music was David Bowie who, alongside David Pullman, launched ‘Bowie Bonds’ in the late nineties.
However, as the specter of piracy began to swirl around the music industry, in 2004 these bonds were downgraded at Moody’s from an A3 rating to Baa3.
Bowie’s bonds did actually end up returning the full $55 million investment that they attracted from investors, plus an agreed rate of interest.
But the wobble spooked Wall Street, and set back music rights’ potential as a basis for bonds.
The post-Spotify world has changed all that.
That’s partly thanks to streaming, with its predictable future royalty income patterns for catalog rights; and it’s partly thanks to a surge in Wall Street’s confidence over investing in music assets, helped by the performance of companies such as Hipgnosis Songs Fund and Primary Wave.
KKR isn’t the first company to launch its own equivalent of ‘Bowie Bonds’ in the modern era: In December, private equity company Northleaf Capital announced it was raising $303.8 million by selling Asset-Backed Securities (ABS) supported by music rights – including songs created by Pete Townshend, and by country star Tim McGraw.
That news came shortly after Toronto-based Northleaf took ownership of an interest in music catalogs at Spirit Music Group via a $500 million deal.
Like the KKR offering, those Northleaf music-backed bonds were expected to achieve an ‘A’ rating from Kroll Bond Rating Agency.
As MBW has previously explained, 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 typically looking for an ‘A’ rating or above; a much lower rating will result in something being labelled a ‘junk’ bond.
The music industry will now wait and see which other rightsholders might now turn to selling music-based bonds to raise capital, as a new chapter in the financialization of music rights opens up.Music Business Worldwide