Old Habits Die Hard

Key DataAfter the financial crisis and subsequent downturn of the economy as a whole one would think that old school financial products are “out” and financial creativity is “in”. However, Morgan Stanley unveiled earlier this month  a US$ 250 million IP securitization for Vertex Pharmaceuticals, a US biotech company that would see investors repaid from contractual milestone payments on a drug still in development. Old habits die hard, despite an almost freeze in securitization markets in 2008 and early 2009 that led to a dramatic shortage of lending power, a “credit crunch”.

Intellectual property securitization has had a promising history- from the initial excitement over Bowie Bonds, which securitized David Bowie’s song catalog, and other early deals, followed by a lull over the years 2003-2006, during which it was thought the idea was dead. In 2007 IP securitization was. They are basically retail products and franchises, mostly patents and trademarks rather than copyrights. Some time ago Goldman Sachs closed a $200 million IP securitization for IHOP backed by its intellectual property and franchising assets. Lehman Brothers lead in the top days of securitization an IP deal for Domino’s Pizza; it raised $1.85 billion. Dunkin Donuts really got the IPO ball rolling in May 2007. All of this being fueled in part by hedge funds and the liquidity they bring. With the marketplace shifting to a more knowledge-based, or “IP-centric,” economy and major investment banks testing the waters, IP securitizations may once more try to change the financing landscape and may revive the possibility that this type of arrangement will become more mainstream. Securitization normally refers to the pooling of different financial assets and the issuance of new securities backed by those assets. In principle, these assets can be any claims that have reasonably predictable cash flows, or even future receivables that are exclusive. Thus securitization is possible for future royalty payments from licensing patents or trademarks (or compositions or recording rights of a musician). At present, the markets for intellectual property asset-based securities are still rather small, as the universe of buyers and sellers is limited. But if the proliferation of IP as the new asset class then it is only a matter of time before all concerned will develop greater interest and capacity to use IP assets for financing business start-ups and expansions. As more cash flows are generated by intellectual property, more opportunities will be created for securitization.

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