The funding of copyrights from music catalogues – to finance and refinance acquisitions etc. - has traditionally been done by specialist banks and lending teams. A number of US and UK lenders have teams dedicated to this sector and capital market transactions have been popular in recent years. Securitisations in particular suited the relatively stable revenues of mature catalogues and had the advantage of providing long term debt with a low funding cost.
In the last couple of years, securitisations of music catalogue rights had become challenging. File sharing software made an impact on revenues in the industry and, while this posed a business problem for artists and labels, it caused a significant structural problem for securitisations. Securitisation structures rely on stability and predictability of income. When this became eroded in fact and in perception, some of the structures came under strain.
A move away from securitisations left traditional bank lenders as the providers of debt. Since the middle of last year though, things have become even more challenging as rights owners and funders have struggled to come to terms with the infamous credit crunch.
This is not intended to be a bad news story. There is positive news even in the current environment. At least four separate factors can be identified and together these may have a powerful effect.
1. There are significant new sources of funding. While the credit crunch has certainly had an impact on liquidity in the debt markets, its influence has been worst in the large M&A market and in the capital markets. Smaller deals can still be done and banks are looking in particular at alternative asset classes to provide them with a source of transactional revenue from fees for deals which they structure and sell. In addition, hedge funds have also entered the market. Some funds have been established specifically to invest in or lend to the sector and others have been prepared to commit smaller amounts of their capital to "non-traditional" deals to provide an interesting story for their investors.
2. A number of proposals designed to assist artists are now the subject of high profile lobbying and these may make catalogues more attractive to investors and funders. The extension of copyright protection for sound recordings from 50 years to 95 years will add value to catalogues. A suggestion that a proportion of the revenue generated from the additional 45 years should create a fund for session musicians who played on the particular tracks may extend the number of rights holders who will have an interest in how they can extract value from their rights. Another example is the interest that the EC Internal Markets Commissioner, Charlie McCreevy, is taking in a proposed private copying levy. The influential Music Business Group has suggested a licence solution and there is industry support for a Europe-wide solution. In addition, the EC is suggesting that collecting societies should begin to compete on price. While this is not popular in parts of the industry there will be benefits to other rights holders from increased revenue generation.
3. The EMI takeover, however sceptical some industry insiders may be, will be bound to drive innovation in the sector. Whether or not private equity models can be easily adapted, the desire to look at the industry and revenues in a new way must provide models to be followed elsewhere in the industry. Significantly, the size of the EMI catalogue enables large-scale funding to be achieved and the proposal for a securitisation to refinance acquisition debt will provide a very public example for others to consider aggregation models. A return of liquidity in the future will lead to a lot of activity.
4. The credit crunch will give rise to opportunities in this as in every sector. In all markets there are distressed sellers, financing structures which have become too expensive for the existing borrowers and participants who are reviewing the scope of their businesses. Over the last couple of years the basis on which catalogues are traded, a multiple of NPS (Net Publisher's Share), has made sales difficult to execute because of the levels of multiples and the cost of debt. In a more challenging market NPS multiples should fall and lead to greater deals.
There are some well-publicised reasons to be gloomy. There are, however, still reasons to be cheerful. We will see which view prevails.
Written by IP Finance's latest team member Charles Kerrigan, posted by Jeremy.
A sudden and somewhat random thought occurred to me yesterday in the course of a conversation with Craig Bailey of Questel Edital. 
