Entertainment-Related ABS to Break New Ground


What exactly do Hugo Boss, the Indiana Hoosiers and Dr. Seuss have in common?

Their revenue streams are hot and are primed for the next wave of entertainment-related securitizations, according to ABS professionals at a recent industry conference in Puerto Rico sponsored by Strategic Research Institute.

For example, in the sports arena, cash flows from sales of tickets, concessions and skyboxes are all ripe to be harnessed, packaged into bonds and sold to investors.

"The Big 10 schools need buildings," said Robert D'Loren, president and chief operating officer of CAK Universal Credit Corp. "It may be the future of sports securitization. I know I'd like to see that."

Along the same lines is the securitization of cash flows from publishing companies, said Bruce Maier, vice president at Structured Finance Advisors, who is particularly keen on the "attractive and exciting" possibilities with children's book assets.

"Dr. Seuss and The Cat In The Hat' were here yesterday, today, and will be here tomorrow," he said. "Understand the cash flows."

Another potential is the fashion and apparel industries. More than "just a pair of jeans," as one source put it, licensing agreements with labels such as Pierre Cardin, Bill Blass and Hugo Boss, could present huge opportunities for securitization. Indeed, D'Loren forecasts that the apparel industry will generate $2.5 billion in royalty cash flows by the end of the year, rising to $4 billion in 2000 and to $10 billion by 2001.

CAK's last entertainment private placement was backed by apparel-industry royalty payments. Reportedly, the royalty stream was valued at nearly $40 million (ASR 9/20).

However, looks can be deceiving when doing these deals, sources say. A straight-forward transaction featuring your favorite performer can have a number of pitfalls. Just ask Michael Jackson, who was slated to price a $100 million securitization, but shelved the plans after structural problems plagued his deal.

"In terms of really assessing risk from a lending perspective you need to understand who is issuing," said D'Loren. Admittedly, this can be difficult given the complexity of the structured deals.

To be sure, tracking cash flows can be tricky considering sources of revenue can include publishing, mechanical, performance, synchronization and artist royalties. That is why entertainment-related securitizations are such a legal intensive asset class, Maier said. Even before a deal circles, these transactions require lawyers involved in the transactions, in order to track the cash flows, to get investors comfortable with the structure and to conduct due diligence.

Complicating matters further is that while in most cases the issuer is a catalog of published music owned by an individual or group, a factor of equal importance is the management of the talent.

"Records don't sell themselves," said Howard Finklestein, a lawyer at Kaye, Scholer, Fierman, Hays & Handler.

If a band has been successful for the last 20 years with the same manager, and that manager should leave, chances are that the band may not achieve the same results as before, Finklestein said. "If this happens," he says, paraphrasing an investor, "you'll be playing at my son's bar mitzvah."

But, as entertainment securitization continues to develop and encompass more and more different revenue streams across industries, it also establishes itself as a respected and legitimate funding mechanism.

Partly to escape the stigma of being little more than a "trendy" asset class, D'Loren and others advocated a renaming of the sector to reflect that maturity.

"I want to change it from entertainment royalty simply to revenue stream securitization," he said.