The name’s bonds. Music bonds.


The MBW Review is the place we goal our microscope in direction of a number of the music biz’s greatest latest goings-on. This time, we predict the subsequent large step for the nice financialization of music rights in 2021. The MBW Review is supported by Instrumental.

David Bowie. What a man.

As nicely as all of his zeitgeist-shaping music – and clear-headed philosophical forecasts – Bowie was additionally one thing of a monetary pioneer.

Working with David Pullman, Bowie famously launched the highly-innovative ‘Bowie bonds’ in 1997.

These noticed rights to Bowie’s royalties within the US securitized into bonds.

In plain English, bonds act like loans, however with traders ‘lending’ an organization / entity cash quite than a financial institution.

Buying these bonds – as long as the underlying asset doesn’t default – provides these traders a solution to get a assured return from their funding, over a set interval of years.

Bowie bonds, for instance, supplied a fixed annual return of 7.9%, over a interval of 10 years, all based mostly on the Thin White Duke’s royalties.

Why are we combing over historical past right here?

Because MBW hears from a number of senior sources that ‘Bowie bonds’ – that’s, bonds secured towards music belongings – are about to make an enormous comeback, with a transformational impact on the worth of this business.

Once once more, it seems Mr Bowie was far forward of the instances.

What’s typically assumed about Bowie bonds, seeing as they disappeared in 2007, is that they someway failed. This is unfaithful.

As defined in the latest episode of MBW podcast Talking Trends, what really occurred is that the consumers who spent $55 million on Bowie’s bonds received their a refund, plus their agreed charge of curiosity.

Bowie (as a result of he was and stays, y’know, a genius) used the cash these bond-buyers ‘lent’ him to re-acquire his personal recordings catalog, which might be now worth somewhere up to $1 billion.

So everybody was completely satisfied, proper? Bowie, his bond-buying traders, and the monetary neighborhood at massive?

Not fairly.

Things received wobbly, as a result of the decade-long interval throughout which the Bowie bonds matured (1997 to 2007) was… not precisely essentially the most secure period in music business’s historical past. *Waves at Napster and Limewire*

That wobbliness, in flip, had a problematic domino impact on Big Finance.

This is the vital a part of this story – the important thing factor that’s modified from 2007 to now.

And it’s exactly why music-affiliated bonds, based on MBW’s high-up sources, are about to turn into one of many business’s tales of 2021.

So… earlier than an organization provides traders / the market the chance to purchase bonds, stated bonds should be rated by certainly one of a handful of venerable establishments.

These establishments, definitely within the US, are often certainly one of Moody’s, Standard & Poor’s, and Fitch.

What these companies are score, in the end, is the standard of the underlying asset / enterprise behind the bonds. i.e. the factor that generates the cash to pay traders their unique a refund (the principal), plus the agreed charge of curiosity.

Sometimes, bonds get good rankings, generally they get exceedingly good rankings, and generally they get very poor rankings… what you’ve little question heard to being known as “junk bonds”.

These rankings in the end direct the extent of investor confidence that every set of bonds attracts.

In the case of Bowie bonds, the underlying asset – i.e. Bowie’s music, and the cash it was producing – immediately appeared quite susceptible because the age of piracy crashed into the age of CD gross sales.

Initially, in 1997, the likes of Moody’s gave Bowie bonds an investment-grade score; aka. platinum-plated, bet-the-house-on-it, super-solid stuff.

But then, as the entire music rights business started to nosedive, issues modified.

In 2004, Moody’s downgraded the Bowie bonds from an A3 score to Baa3, a damning transfer which Investopedia calls “one notch above junk status”.

Bowie’s traders would have doubtless been panicking. And Wall Street would have been detecting a stink coming from music belongings that wouldn’t wash off… ooh, for about 17 years.

Because at this time – as nicely you already know, MBW readers – music belongings are back in vogue in the Big Finance community.

Whether it’s Blackstone, KKR, Apollo Global Management or others, the standing of music rights as a pretty “asset class” – an funding vacation spot providing a excessive chance of return to traders – has by no means appeared higher.

That’s partly because of the inventory market trailblazing of Hipgnosis Songs Fund et al, and largely because of streaming: not solely does the income ‘pie’ of music develop each time the subscriber base of Spotify et al will increase, however the predictability of music royalties has by no means been extra sturdy.

Case in level: Back within the days of Bowie bonds, the monetary efficiency of Mariah Carey’s All I Want For Christmas Is You – through CD and obtain gross sales – would have been far much less predictable every year than it’s at this time, when it rockets again as much as the highest of streaming charts each December (and rakes in tens of millions of {dollars}).

That’s actually why Hipgnosis bought it.

Now we’ve lined the context… right here, buried proper on the backside of proceedings, is the large information.

MBW’s sources inform us that at the least one main music rights portfolio proprietor is presently in search of a good-looking score (maybe a platinum-plated, bet-the-house-on-it, super-solid-stuff score) for bonds securitized towards music belongings.

Yup: Bowie bonds are again!

Ultimately, if stated bonds are rated nicely by the likes of Moody’s after which – crucially – carry out at or past expectations for traders, it’s going to extend the worth of music rights at this time very considerably.

As was stated on the Talking Trends podcast last week: “Mark my words, we’re going to see a large financial entity buy a massive catalog of rights, then they’re going to split that catalog up into loads of bonds, and sell those bonds on to investors – and crucially, they’re going to be able to get a good rating for them.

“Don’t just watch these masses of billions pouring into the music industry right now to get a sense of the value of music rights, and how it’s going to keep on bouncing up and up.

“Just think of the genius of David Bowie – and understand that financial engineering could be the next big story in music, and make an already blossoming sector even richer.”

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The MBW Review is supported by Instrumental, one of the music industry’s leading growth teams for independent artists. Instrumental uses data science to identify the fastest growing independent artists on the planet and then offer funding, premium distribution and marketing support to take them to the next level, without taking their rights.Music Business Worldwide

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