Asset securitization offers an efficient structuring solution to finance and capitalize certain businesses. It has been used in Canada and internationally to finance and refinance auto and equipment leases and loans, mortgages, credit cards, student loans, insurance premiums and other assets that have predictable and verifiable cash flows. It may be news to some that securitization has also been used to finance music catalogues and related businesses.

Interest in music royalty securitization emerged prominently in 1997 when David Bowie executed a US$55 million deal representing the first asset securitization backed by future music royalty receivables and intellectual property rights. This move established a precedent followed by various artists, including Rod Stewart and Iron Maiden, who pursued similar securitization structures for their royalty streams.

This appetite for music-based asset-backed-securities is only growing: the last few years saw several multi-billion-dollar catalogue financings.

Royalty-backed securitization in the music industry involves monetizing cash flow streams generated from copyright interests in song and sound recording catalogues. The securitized asset pool typically encompasses one or more items in an artist's "bundle of rights," including publishing royalties, record royalties, name and likeness right revenue and merchandising revenue. As in most asset securitization deals, a music royalty-backed securitization entails separating specific cash flow-generating assets in a separate vehicle, and offering securities backed by the assets in question.

Transaction structure

Companies or individuals often become interested in structuring a securitization when they realize that specific assets of theirs are especially attractive to investors. Securitization offers a way to segregate these assets into a new investment entity (referred to as a special purpose vehicle, or “SPV”) and offer securities to investors who want to purchase an interest tied to only those assets.

The SPV is usually financed through the investors purchasing debt instruments (such as bonds) issued by the SPV and backed by the cash flows of the SPV’s assets. The SPV, in turn, is able to purchase those assets in the first place by advancing the investors’ funds to the original owner of the assets in exchange for the assets.

The transaction structuring is the same in the case of music royalty securitization. The special assets in question are the rights to royalty and licensing income; these are transferred from the song/recording catalogue rights owner (the “Rights Seller”) to a SPV for at least the duration of investors’ investment in the SPV. An important advantage of the use of a SPV is that the assets transferred to it from the Rights Seller are expected to be inaccessible to the creditors of the Rights Seller if the latter ever goes bankrupt. A valid "true sale" to the SPV of the assets during the securitization process is essential to such a purpose.

Music intellectual property rights

In general terms, there are two distinct copyright interests when it comes to music:

  1. Musical composition copyright: First, the “musical work”—i.e., the song, or musical composition, including lyric and melody, enjoys copyright protection. The business of monetizing this copyright is referred to as music publishing, which encompasses not only sheet music, but also radio play and other public performance of songs, embodying songs in recordings, synchronizing songs with film, TV, video games and ads, and more.
  2. Sound recording copyright: Second, each recorded performance of a musical composition (known as the "master recording" or "master") also benefits from copyright protection. The rights to each distinct recording of the same musical composition may have different owners and can be independently exploited and licensed (e.g., Tracy Chapman’s and Luke Combs’ respective recordings of the song “Fast Car” enjoy separate copyrights).

Each of these copyright interests generates separate income streams. For a securitization transaction to proceed effectively, Rights Sellers must demonstrate clear ownership or control of the applicable copyright interest(s) and the legal right to effectively sell and assign that (those) interest(s) to the purchasing SPV free and clear of third-party rights, interests and encumbrances.

Additionally, the legal right to these copyrights must continue longer than the term of the debt securities forming part of the securitization and the copyrights must not be limited by any regulation or contract that may affect the cash flows which investors expect under the securitization.

Key considerations

There are key components to all successful securitization transactions. These include the effective “true sale” of the receivables—i.e., the royalty income streams—and related rights to the SPV purchaser; the continued seamless servicing of the purchased receivables to ensure that they perform as expected; and the issuance of securities from the SPV that are structured to properly allocate the risks and rewards of the assets that sit inside the SPV.

In addition to the above customary features for implementation of sound securitization transactions, successful music securitization typically requires the following:

  1. Established catalogues with demonstrated steady performance.

    Music royalty securitizations typically involve catalogues with a proven track record of generating consistent income over an extended period, often spanning decades.

  2. Clear chain of title for all composition and master recording rights.

    Securitization parties must ensure that the Rights Seller has all requisite copyrights in place, ensuring the rights to the entire music catalogue being securitized.

  3. Long-term viability of the underlying intellectual property.

    The legal right to exploit the copyright must outlast the term of the securitization investment instruments and the copyright cannot be limited by any regulation or contract that may affect the normal payout of the cash flows and thus undermine the value of the SPV-issued securitization instruments.

  4. Comprehensive copyright documentation and ownership verification.

    Thorough due diligence is essential to verify ownership and control of both musical composition and sound recording copyrights, as well as the ability to assign these rights to the SPV.

The continued expansion of music catalogue securitization suggests increasing sophistication in intellectual property-backed financing structures, likely extending beyond the music industry in coming years. Insofar as securitization provides an efficient financing tool for many businesses, we expect to see securitization and similar financial products increasingly employed by music catalogue owners and their stakeholders as they strive to achieve cost-effective and diversified funding strategies.

Should you have any questions or concerns, please feel free to reach out to a member of Gowling WLG’s Entertainment & Sports and Structured Finance and Securitization teams.