MOODY'S OUTLINES MUSIC ABS ANALYSIS


Describing them as securities on the cutting edge of the asset-backed securities market, Moody's Investors Service released a special report detailing its ratings approach to intellectual property securitizations.

As the rating agency sees it, intellectual property securitizations represent a "vast potential market for securitization covering the gamut from music royalties, which have already been packaged, to movie libraries, book publishing, trademarks, patents and sports contracts (see related story, page 16).

However, the rating agency warned that the successful growth of intellectual property ABS will require educating a broad spectrum of investors to the unique attributes of this asset class - a development the rating agency does not expect to occur overnight "because there is little standardization among these assets."

Nevertheless, Moody's expects issuance volume to increase steadily during the next two years as some issuers find this type of financing more attractive than current forms.

The potential benefits include a lower coupon rate, a longer term and "the ability to reclaim the asset once the debt is fully repaid," Moody's said.

In many respects, analyses of intellectual property transactions are no different than other forms of securitizations. However, Jay Eisbruck, a vice president and senior credit officer at Moody's, cites one significant differentiating characteristic: These securitizations are "highly dependent on popular tastes, adding a layer of complexity to the analysis."

To date, five privately placed deals aggregating $100 million have received a Moody's rating.

Eisbruck said he does not know whether it will be easier or more difficult to market these securities in the public market. However, he does expect them eventually to enter the public arena as the transactions become bigger and a wider array of investors become more comfortable with these types of bonds.

Yet from a ratings standpoint, Eisbruck noted, there is no difference in the analysis.

Moody's analyzes the potential future revenues generated by a pool of music royalties by focusing on the particular works involved and the types of rights included, the involvement of any possible co-owners of the assets, the length of current rights agreements and remaining ownership rights. Historical data is an important component of the valuation of the rights as well, Moody's said.

An additional part of Moody's evaluation is a qualitative assessment of the quality of servicing and/or administration of the music catalog. The marketing and distribution of recorded music can be an essential element in its success or failure and therefore can drive the revenue generation of a catalog.

Moody's said it also evaluates the record company, publisher and performing rights society in a music royalty transaction because of the important role each plays.

Another consideration is the rating of the companies that own the major record labels. Since their existence "is necessary for the sale of albums, it could be difficult to rate an ABS transaction higher than the record company's own rating," Moody's said.

Also entering the ratings equation are factors such as the marketing skill of the publisher and record company, the willingness of the artist to promote his or her work and music industry trends.

Evaluation also includes structural cash flow analysis, said Eisbruck, including the effects of triggers that require the trustee to sell the assets if revenues fall below specified levels.

To date, the royalty deals rated by Moody's have been backed by a single pool of collateral. However, the next step could be a transaction backed by a pool of different catalogs. Moody's believes the diversification could benefit the transaction, although it could be difficult to achieve in practice, said Eisbruck.

As this form of securitization expands to include assets such as sports contracts and endorsement agreements, Moody's said it will tailor its analysis to the particular asset being packaged. But, Eisbruck added, the framework will be similar. - Dave Feldheim