A Celebrity Bond is an asset-backed security issued by a celebrity or an artist to receive money upfront from investors. In exchange, the investors earn the right to collect future royalty receipts to the works covered by Intellectual Property Rights (IPR) as listed in the bond. These bonds can be backed up by any type of art that is backed by royalties.
This type of bond was first pioneered in 1997 by investment banker David Pullman through his $55 million David Bowie bond deal. In 2011, Goldman Sachs attempted to create a celebrity bond backed by a music catalogue that included Neil Diamond and Bob Dylan, but that fell apart. More recently in 2017, the Denver based Royalty Flow Group had offered 3.3 million shares at $15 each to own a part of the music catalogue owned by Marshall Mathers, aka Eminem.
Features of Celebrity Bonds
- Ownership: The artist retains ownership of IPRs. Moreover, they don’t have to pay taxes on the royalties they receive. Since, yet-to-be received royalties are considered loan interests and principal payments, which are non -taxable.
- Non-Recourse: The non-recourse feature of the bond protects the celebrity’s assets and future art-work.
- Cash Flow: The celebrity receives money upfront in exchange for forgoing royalty on his/her IPR and the investors receive cash flow from royalties at a pre-specified coupon rate.
- Risk Transfer: The risk of the tracks/art losing its appeal or value is transferred to the investors.
The most notable celebrity bonds are ‘Bowie Bonds’. It all started when David Bowie was looking for a solution to his financial problems and ended up at Wall Street. He was considered to be UK’s wealthiest rock artist, with Rolling Stone magazine estimating his net worth at $917 million. However, Bowie had a cash flow problem. The expensive lifestyle of New York compelled the artist to shift to Berlin in the 1980s, but the problem persisted.
Back in the mid-1990s, the only way artists could seek financing for their musical endeavors was to get a recording contract from a major label and have them finance all their needs.
Simply put, the idea was that the label provided the artist with a loan unless the recordings hit the market and the artist was capable of paying off all his dues. However, the Bowie Bond revolutionized the procedure of seeking financial help from the market by validating the idea that an artist’s worth today could be measured using future income streams of intellectual property as well. This was before the World Wide Web, well before music went digital and long before crowding was seen as a source for funding.
There might be a question in everyone’s mind as to why can’t an artist simply opt for bank loans instead of bonds? This is because, bank loans tend to be more expensive, with limited financing and an obligation to payback as the bank states. On the other hand, bonds can be liquidated at any time, within the tenure set by the artist. Hence, any individual can issue bonds if they have enough pool of assets to back them.
In 1997, David Bowie met the renowned Wall Street investment banker David Pullman. Pullman came up with an amazing idea of ‘Celebrity Bond’. This deal securitized revenue from 25 albums (287 songs) released before 1990 and was backed by Bowie’s current and future royalties from these albums. The 10-year Bowie Bond promised a 7.9% return, raised $55 million and earned a triple-A rating from Moody’s. They were purchased by Prudential Insurance Company that partnered with David Pullman.
Bowie bond was the first, in the line of Pullman Bonds, that securitized intellectual property rights of music artists. Following the success of Bowie, David Pullman went on creating similar bonds for music artists such as James Brown, Ashford & Simson, the Isley Brothers, and Holland-Dozier-Holland publishing catalogues.
The market did not predict the rise of internet piracy and single-song format after Apple iTunes, both of which hurt the album sales and royalty. By 2004, Moody’s had cut Bowie Bonds’ rating to Baa3, just a notch above the junk bonds category.
Bowie Bonds, in short, have come a long way. The original 10-year bond was paid off in full maturity in 2007, luckily this was just before the 2008 financial crisis. Therefore, we can say that no artist has made their name in the market, as Bowie did.
Contributor: Team Leveraged Growth
Co-Contributor: Devansh Bihani & Mohak Batra
Research Desk | Leveraged Growth