Companies today are investigating novel methods to securitize and collateralize their rights in not only tangible but also intangible assets such as intellectual property. This trend, first emerging in the 1990s with traditional royalty securitizations in music and pharmaceutical industries, was marked by the creation of “Bowie Bonds“. Devised by singer David Bowie and his financial advisor, these bonds used future royalties as a guarantee. Since then, the practice has grown more sophisticated and is presently seeing application across several industries.
Deals such as these adopt various forms like asset-backed financings, secured notes offerings or other methods like whole-business and digital infrastructure securitizations. It allows businesses to draw value from their IP assets to meet their most pressing liquidity needs. Current market pressures including constraints on capital markets, unfavorable interest rate environments for borrowers and a hunger amongst investors for innovative capital deployment tactics have driven interest in these types of transactions.
In these transactions, the company’s IP assets are pivotal and are pledged as collateral. A mechanism is set up that could potentially strip a company of these critical assets in case of a default, but not before. During normal business operations, nothing changes; however, in the event of a default, the company risks losing or harming those essential IP assets unless certain steps are taken to maintain the transaction structure which benefits the secured parties.
Case in point, recent airline loyalty program financing deals helped sustain the airline industry during the Covid-19 pandemic. The airlines’ critical frequent flyer program assets were pledged as collateral. The value in this type of structure lies in the mutually assured destruction, ensuring all parties exercise their rights and remedies responsibly.
According to a recent US Supreme Court ruling in the Mission Products case, an alternative structure is increasingly being adopted. This model leverages certain protections provided by the US Bankruptcy Code, specifically the operation of Section 365(n). These measures allow a licensee of certain intellectual property rights to retain its license (including exclusivity) if the license agreement is dismissed in the licensor’s bankruptcy.
This structure has several benefits. It aids market understanding of the transaction, ratings agencies usually provide a company with a ratings boost once they’re assured of the finesse of the deal technology, and the non-rivalrous and highly divisible nature of IP assets provides unique opportunities for these to be shared, split, licensed, and transferred in ways that aren’t possible with physical property. Also, these transactions allow companies to engage in tax planning through the use of transfer pricing within their corporate structures.
Looking ahead, we can expect more growth and innovation as the market continues to embrace such deals that help companies unlock value from an untapped source to meet their liquidity requirements.
For more details, visit Bloomberg Law.