Music Catalog Securitization

SPV structure: Delaware or Cayman LLC formed specifically for transaction (bankruptcy-remote entity). No operations except owning copyrights and collecting royalties. Independent director appointed (not controlled by artist) preventing voluntary bankruptcy filing. Strict separation from artist's other businesses and assets. SPV taxed as partnership (pass-through) avoiding entity-level taxation.

True sale requirements: Transfer must be absolute and irrevocable—cannot give artist buy-back rights, call options, or repurchase provisions without jeopardizing sale characterization. Artist retains no beneficial interest in copyrights during bond term. Legal opinions ($200K-500K cost) confirm transfer survives bankruptcy—critical for investment grade rating. If court re-characterizes as loan not sale, bondholders become unsecured creditors in artist bankruptcy.

Copyright assignment mechanics: Artist executes copyright assignments recorded with US Copyright Office. Assignments cover: existing catalog (defined by album/song lists), rights to collect all royalties worldwide, rights to enforce copyrights against infringement, rights to license to third parties (sync, covers, samples). Artist explicitly warrants: owns 100% of copyrights, no liens or encumbrances, no pending litigation, all songs properly registered.

Consideration and purchase price: SPV pays artist purchase price equal to bond proceeds minus expenses ($55M Bowie - $2M structuring costs = $53M net to artist). Payment at closing via wire transfer. Artist cannot pledge, borrow against, or hypothecate purchase price—must be separate from artist's bankruptcy estate. Structuring costs: legal $500K-1M, rating agency fees $200K-400K, underwriting fees 2-3% of bond size, trustee/custodian setup $100K-300K.

Overcollateralization: Bonds sized at 60-70% of independent appraisal value. Bowie catalog appraised at $80M-90M, bonds issued at $55M = 61-69% LTV. Provides 30-40% cushion against catalog value decline before bondholders impaired. Coverage ratio: annual royalties $8M ÷ annual debt service $4.4M (7% coupon) = 1.8x coverage. Rating agencies require minimum 1.5x for A rating, 1.3x for BBB.

Reserve accounts: Cash reserve funded at closing equal to 6-12 months debt service ($2.2M-4.4M for Bowie Bonds). Replenished quarterly from excess cash flow before any equity distributions. Purpose: cover temporary royalty shortfalls (seasonal variations, platform payment delays, collection disputes). If reserve drawn below required level, cash trap activates—100% of royalties retained until reserve replenished (no equity distributions).

Insurance policies: Catalog securitizations can include: key person insurance ($10M-25M policies on artist covering death/disability), business interruption insurance (covering catastrophic revenue loss), and errors & omissions (covering copyright challenges). Insurance expensive (1-3% annually of coverage) so often excluded for stable legacy catalogs. More common for artist-dependent catalogs where ongoing creation/touring drives catalog value.

Sequential payment waterfall: Monthly royalties flow to trustee account. Quarterly distribution: (1) Trustee/servicer fees (0.25-0.50% annually), (2) Reserve account replenishment to required level, (3) Bondholders interest payment ($55M × 7% ÷ 4 = $962K quarterly), (4) Principal amortization if required (typically bullet maturity), (5) Equity distribution to artist/seller (residual excess cash). Waterfall eliminates payment discretion—automatic and mechanical.

Rating factors analyzed: (1) Cash flow stability—10+ year historical royalties with <20% annual variance preferred for investment grade. (2) Catalog diversity—genre, era, geographic mix. Single-hit wonders rated lower than 50+ song catalogs. (3) Streaming adoption trajectory—catalogs with growing streaming offset declining physical/download. (4) Artist cooperation risk—ongoing artist involvement in promotion vs retired artist. (5) Legal completeness—clear chain of title, no ongoing disputes, proper registrations.

Stress testing: Rating agencies model: (1) Recession scenario—30-40% royalty decline lasting 2-3 years testing reserve adequacy. (2) Technological disruption—streaming rates falling 20-30% testing overcollateralization. (3) Genre obsolescence—catalog falling out of favor reducing royalties 40-50% long-term. Bonds must survive all stress scenarios without defaulting to achieve investment grade rating. Bowie Bonds initially passed but failed post-Napster stress when actual royalties fell 50%.

Investor base and pricing: Securitizations typically placed with: insurance companies (seeking long-duration assets matching liabilities), pension funds (seeking stable income), and specialty CLO/ABS funds (seeking yield pickup vs traditional ABS). Pricing: investment grade music ABS priced at +200-400 bps over comparable Treasuries (Bowie at +150 bps due to A3 rating and novelty appeal). Junk-rated music ABS (BB/B) priced at +500-800 bps over Treasuries.

Liquidity and secondary trading: Music securitizations trade infrequently in secondary markets—typical bid-ask spread 5-10 points (versus 0.5-2 points for liquid ABS). Holders typically buy-and-hold to maturity. Limited dealer inventory and sporadic trading creates mark-to-model pricing risk—NAV calculations based on internal assumptions not market prices. Post-2008 crisis, Bowie Bonds traded 70-85 cents (30-15% discount to par) despite never missing payment, reflecting illiquidity premium not credit deterioration.

Post-2000 securitizations: Iron Maiden (2000, $30M), Ashford & Simpson (2000, $25M), James Brown estate (2007, $30M). Collective total ~$300M across 12 deals. Volume remained low due to: artist reluctance (preferred bilateral sales to publishers), expensive structuring (only economics at $50M+ size), and rating volatility (piracy fears deterred investors). By 2010, new issuance effectively ceased.

Streaming-era revival: 2020-2025 saw renewed interest as streaming provided stable cash flows. Concord Music (2021, $1.8B across 3 tranches) first major post-streaming securitization. Hipgnosis Songs Fund explored securitization 2022-2024 (never completed due to liquidity crisis). Round Hill Music successfully completed $150M securitization 2023. New structures incorporate: streaming data analytics (real-time royalty tracking), artist engagement provisions (incentivizing promotion), and shorter maturities (7-10 years vs 10-15 years reflecting faster obsolescence risk).

Alternatives to securitization: Most artists choose simpler structures: (1) Direct catalog sale to publisher/fund (Universal, Sony, Round Hill)—immediate liquidity, no structural complexity. (2) Joint ventures—artist retains 20-50% ownership, receives upfront payment plus ongoing royalties. (3) Advance against royalties—label/publisher provides non-recouping advance secured by catalog without ownership transfer. Securitization only makes sense for mega-catalogs ($50M+ value) where rating arbitrage and efficient pricing justify 3-5% structuring costs.

Regulatory and accounting considerations: SEC registration required for public offerings (144A private placements exempt but limit investor base). Accounting: artist recognizes sale proceeds as income (ordinary or capital gains depending on copyright holding period—unclear). Investors treat as debt securities (interest income). SPV files separate tax returns (partnership). Transfer taxes (varies by state, typically 0.5-2% of consideration). Copyright assignments must be recorded with Copyright Office ($105 per title).