Focus: Stars mine gold from rock of wages

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The Independent Online
DAVID BOWIE started it all two years ago, British heavy rockers Iron Maiden got in on the act in February and James Brown, the self-styled "hardest-working man in showbusiness", has followed suit this week. The attraction is raising a large wad of cash through a loan secured on old chart-topping hits. The process is known as securitisation, the bundling together of illiquid assets - such as the copyright to songs - to provide the security backing for a bond issue.

Since the ground-breaking "Bowie Bonds" were issued by the New York financier David Pullman, two years ago, critics say the steam has gone out of the securitisation bandwagon. That issue raised pounds 34m for the androgynous rocker, but there have been few deals since. Mr Pullman will have none of this.

He was in London this month to push his latest pounds 25m securitisation on behalf of the "Godfather of Soul", James Brown. "We're working on half- a-dozen deals now and we plan to complete another half-dozen this year," says Mr Pullman.

If he and other "Bowie Bond" pioneers have their way, hundreds of writers of pop hits will get the treatment. He then intends to extend the technique to other forms of intellectual property, such as back catalogues of TV hits, films, and even hi-tech software. "The sky is the limit," he says.

Andy Taylor, chief executive of Sanctuary, the management and intellectual property company that did the deal for Iron Maiden, says there are two key requirements for doing a "Bowie Bond": Firstly, a reliable and predictable income stream from a well-copyrighted piece of intellectual property; and secondly, a good track record.

A good example is the James Brown back catalogue that Mr Pullman has just securitised. The ubiquitous entertainer has written 94 songs that made it into the American Soul Top Ten. The songs stretch back more than 30 years, Mr Brown owns the copyright on all, and hits including I Feel Good and Sex Machine continue to earn royalties. Investors can be confident the songs will earn more royalties over the 10-year period of the bonds, and these royalties can pay the interest.

On the other hand, Mr Taylor says, the Spice Girls wouldn't be suitable for a bond. "Because, however popular they are at the moment, they haven't got a long track record, in relative terms. A lesser artist, who has been selling records in smaller numbers but regularly over 20 to 30 years, would be ideal."

Mr Taylor, who has managed Iron Maiden (greatest hit: Bring Your Daughter to the Slaughter) since founding Sanctuary in 1979, happily admits he got the idea for the bond from Mr Pullman, an ebullient, fast-talking Wall Street investment banker. Mr Pullman approached Mr Taylor last year after hearing talk in the gossipy entertainment industry that the British rockers wanted to cash in on their back catalogue.

Mr Taylor says there is one more vital ingredient: the artist concerned must have some overriding need for cash in hand. "They may need it for something personal, such as a divorce settlement, or a business venture, or perhaps they want to buy back part of their catalogue."

Mr Pullman, 37, says he got the idea for the bonds after 15 years on Wall Street where he had "securitised practically everything else, from mortgages to hospital income streams".

He goes on: "The real killer is that the artists get money now and continue to own the copyright on their work."

In the US, the asset-backed securities market is now worth $200bn. If Mr Pullman can get it right then the rewards are obviously huge. The artist is basically borrowing money and paying it back though future royalties. The cash is free of income tax and, if the royalties are greater than forecast, the bonds will be retired early.

The investor gets burnt if the royalties come in under expectations. But even if the bond collapses, the artist only loses ownership of the catalogue itself - the investor has no rights to pursue the artist's other assets. "Its a non-recourse mortgage - the bond is only secured on the catalogue itself," says Mr Taylor.

And as Mr Pullman puts it: "We're very pro-artist. They get to keep their catalogue."

There are many variations on the Bowie Bond theme. Mr Pullman persuaded the record companies to guarantee the income stream on David Bowie's songs, enhancing the credit-worthiness of the bonds. The Iron Maiden bond involved no such credit-enhancement. It pays 7.4 per cent fixed over 18 years - "better than you can get from most banks", says Mr Taylor.

Rod Stewart, the ex-Faces vocalist who went solo in the 1970s, raised $15m last year through a loan secured on his songs, although this did not involve a bond. That shows artists are interested in raising money against future earnings.

There are signs of some competition stirring against Mr Pullman. For instance, Charles Koppelman, a former record company executive, formed CAK Universal Credit as a joint venture with Prudential Securities this year and says he intends to have completed $100m in deals by the end of August. Mr Pullman shrugs. "Imitation is the highest form of flattery," he says. "But you can't just throw a hundred people at this and expect it to work. I have 30 people working for me. The business (The Pullman Group) is completely private - there is no public documentation, so no one can reverse-engineer it."

Mr Taylor says "at least half-a- dozen" American and British investment banks are having a serious look at issuing Bowie Bonds. He is coy about naming names, because he may end up working with them

So who wants to buy the bonds? Not retail investors certainly, at least not at the moment. Although the bonds tend to pay an interest rate of 1 to 2 points above comparable corporate bonds (that is around 7 per cent to 8 per cent) Mr Pullman has sold them straight to institutions, such as insurance companies, who tend to sit on them.

And what does Mr Pullman get out of it? Front end fees, which cover his fees as well as legal and other administrative expenses, total about 10 per cent of the cost of the funds over the life of the bonds, he says. This level of cost to the artist is "very attractive, compared to a mortgage", he says. Mr Pullman talks eagerly of a time when the bonds will be traded on a market, but admits that is all a long way off. Mr Taylor is sceptical. "The sheer amount of documentation you would need to supply to the security exchange authorities would be huge in the US, because of the specialised nature of the bonds' collateral," he says.

Investors in Bowie Bonds have two major headaches: how will liquidity in such specialised bonds hold up, and will consumers go on buying the songs?

Mr Taylor is confident people will. He's in France with Iron Maiden as they rehearse for a US tour next month. And for anyone who doesn't care for their brand of heavy metal, to quote one of their songs: Run for the hills, run for your lives!