Securitization of Securitization of IntangiblesIntangibles

By By

D. D. ManimegalaManimegala

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SecuritizationSecuritization

It is s structures finance process that It is s structures finance process that distributes risk by aggregating debt distributes risk by aggregating debt instrument in a group. Then issues new instrument in a group. Then issues new securities backed by this group or pool.securities backed by this group or pool.

Securitization is the pooling of cash flows and the issuance of securities backed by underlying assets.

It is to change a financial asset such as a loan into bonds that can be bought and sold in order to raise cash

Intangible Asset Intangible assets, which includes

everything that is not physical or investment but is of value to the company also called “intellectual capital.”

Something that a company has and that benefits it but does not exist physically.

They cannot be touched and felt. They derive their value from the right conferred upon their owner by possession. It includes patents, copyrights, trademarks etc.

Securitization of Securitization of IntangiblesIntangibles

The idea emerged during the late 90’s, The idea emerged during the late 90’s, until then it was only one class of assets until then it was only one class of assets that were leveraged i.e., the tangible that were leveraged i.e., the tangible assets of receivables, plant, property assets of receivables, plant, property and equipment.and equipment.

It was during the end of the 20th It was during the end of the 20th century companies started to realize the century companies started to realize the importance of intangible assets and ever importance of intangible assets and ever since the intangible proportion of since the intangible proportion of company value (market capitalization) company value (market capitalization) has increased. has increased.

Securitization of Securitization of IntangiblesIntangibles

Securitization of intangible assets is Securitization of intangible assets is becoming an alternate/preferred option becoming an alternate/preferred option for raising funds.for raising funds.

Securitization of intangible assets Securitization of intangible assets ensures continuing ownership and ensures continuing ownership and control over all intangible assets.control over all intangible assets.

This provides an opportunity for banks This provides an opportunity for banks and other financial institutions to offer and other financial institutions to offer new, more competitive, debt finance by new, more competitive, debt finance by taking advantage of the intangible assets taking advantage of the intangible assets suitable for supporting debt suitable for supporting debt

Characteristics of the IP-Backed Securitization Market

IP-backed securitization is a recent phenomenon. In 1997 there were $380 million in known IP

backed securitization transactions. In 2000 there were $1.13 billion. The total known

transaction volume in those years was greater that $2 billion.

Between 1990 and 1998, patent licensing revenues in the United States increased by approximately 700% to more than $100 billion showing a compounded annual growth rate of approximately 28%.

The total asset value of patents worldwide is estimated to be one trillion dollars.

Significance

Known Volume of IP Securitizations by Industry

TypesTypes Loans collateralized by title to a patent:Loans collateralized by title to a patent: The first type of patent backed transaction is a loan The first type of patent backed transaction is a loan

with the patent title functioning as the collateral. with the patent title functioning as the collateral. In this case, the lender loans at a loan to value ratio In this case, the lender loans at a loan to value ratio

of between 25-30% of the appraised value of the asset of between 25-30% of the appraised value of the asset (depending on the asset quality, creditworthiness of (depending on the asset quality, creditworthiness of the asset holder, and other risk factors). the asset holder, and other risk factors).

The appraisal method relies on a dynamic, options The appraisal method relies on a dynamic, options pricing based software called TRRU (for Technology pricing based software called TRRU (for Technology Risk Reward Unit) that incorporates live market data Risk Reward Unit) that incorporates live market data from publicly traded, pure play companies from from publicly traded, pure play companies from around the world to estimate the current value of the around the world to estimate the current value of the asset. asset.

Based on the principal that a patent itself is a Based on the principal that a patent itself is a derivative instrument and has a similar payout derivative instrument and has a similar payout structure to a call option.structure to a call option.

Patent-backed Patent-backed securitizationsecuritization

In this type of transaction the cash flows from In this type of transaction the cash flows from a patent are turned into marketable securities. a patent are turned into marketable securities.

In this securitization the patent is the In this securitization the patent is the underlying asset that generates cash flows as underlying asset that generates cash flows as defined by licensing agreements. defined by licensing agreements.

The securitizations can either be asset backed The securitizations can either be asset backed (based on guaranteed payments as defined by (based on guaranteed payments as defined by a licensing agreement) or future flows (based a licensing agreement) or future flows (based on projected royalty streams).on projected royalty streams).

A future flows securitization is generally A future flows securitization is generally riskier, although the risk may be decreased riskier, although the risk may be decreased based on good historical data and accurate based on good historical data and accurate royalty forecasts.royalty forecasts.

Business modelsBusiness models

Patent Licensing & Enforcement Patent Licensing & Enforcement Companies ("P-LECs")Companies ("P-LECs"): :

Royalty stream securitizersRoyalty stream securitizers ReinsurersReinsurers Market makersMarket makers Investment Research FirmsInvestment Research Firms

Patent Licensing & Patent Licensing & Enforcement Companies Enforcement Companies

("P-LECs“)("P-LECs“) These are firms that acquire patents for the These are firms that acquire patents for the

sole purpose of securing licenses and/or sole purpose of securing licenses and/or damages awards from infringing parties. damages awards from infringing parties.

Perhaps the most famous P-LEC is NTP, Inc. Perhaps the most famous P-LEC is NTP, Inc. which has successfully asserted patents which has successfully asserted patents related to email push technologyrelated to email push technology

Another name for a P-LEC is "patent troll," Another name for a P-LEC is "patent troll," although this is viewed as a pejorative although this is viewed as a pejorative reference. reference.

Recently, hedge funds have raised capital for Recently, hedge funds have raised capital for the specific purpose of investing in patent the specific purpose of investing in patent litigation. litigation.

Royalty stream Royalty stream securitizers securitizers

The assets that are securitized are The assets that are securitized are typically intellectual properties, such typically intellectual properties, such as patents, that have been bearing as patents, that have been bearing royalties for a period of time.royalties for a period of time.

eg: Royalty Pharma handled the first eg: Royalty Pharma handled the first pharmaceutical patent-backed pharmaceutical patent-backed securitization to be rated by securitization to be rated by Standard and Poors, which involved Standard and Poors, which involved a patent on the HIV drug Zerit a patent on the HIV drug Zerit

Reinsurers Reinsurers

These are firms that use the techniques of These are firms that use the techniques of reinsurance to mitigate intangible asset risks. reinsurance to mitigate intangible asset risks.

firms exposed to substantial intangible risk firms exposed to substantial intangible risk can issue "intangible asset risk-linked can issue "intangible asset risk-linked securities" that transfer intangible risk to securities" that transfer intangible risk to hedge funds and other players in the capital hedge funds and other players in the capital markets with a sufficient appetite for risk.markets with a sufficient appetite for risk.

Eg: Steel City Re, which is based in Eg: Steel City Re, which is based in Pittsburgh, is a thought leader regarding the Pittsburgh, is a thought leader regarding the use of risk transfer techniques to protect and use of risk transfer techniques to protect and recover intangible asset value recover intangible asset value

Market MakersMarket Makers Firms that are working to provide more Firms that are working to provide more

liquidity to the market for intellectual liquidity to the market for intellectual property.property.

Early market makers offered on-line Early market makers offered on-line intellectual property exchanges where intellectual property exchanges where buyers and sellers could exchange rights in buyers and sellers could exchange rights in licensed intellectual property, usually licensed intellectual property, usually patents.patents.

In 2008, Ocean Tomo launched which it In 2008, Ocean Tomo launched which it styled as "the only public marketplace that styled as "the only public marketplace that allows buyers and sellers to place and allows buyers and sellers to place and receive offers for their intellectual property receive offers for their intellectual property in a completely transparent fashion." in a completely transparent fashion."

Patent Bid Ask now complements Ocean Patent Bid Ask now complements Ocean Tomo's experience in providing multi-lot, Tomo's experience in providing multi-lot, live auctions for intellectual property. live auctions for intellectual property.

On April 22, 2008, Ocean Tomo reported On April 22, 2008, Ocean Tomo reported that it had transacted approximately $70 that it had transacted approximately $70 million in its IP auctions across Europe million in its IP auctions across Europe and the United Statesand the United States

In 2009, The Intellectual Property In 2009, The Intellectual Property Exchange International (IPXI), Exchange International (IPXI), headquartered in Chicago, will begin headquartered in Chicago, will begin operations as the world’s first stock operations as the world’s first stock exchange with an intellectual property exchange with an intellectual property focus.focus.

Investment Research Investment Research Firms Firms

Companies that provide specific Companies that provide specific advice to investors on intellectual advice to investors on intellectual property issues. property issues.

Recently, hedge fund managers have Recently, hedge fund managers have been hiring patent attorneys to been hiring patent attorneys to follow and handicap outcomes in follow and handicap outcomes in high stakes patent cases high stakes patent cases

Global ScenarioGlobal Scenario Globally there have been few companies in the past Globally there have been few companies in the past

which were successful in using their intangible assets which were successful in using their intangible assets for raising debt. for raising debt.

The most famous example being Walt Disney, which The most famous example being Walt Disney, which raised about USD 725 million in the Japanese market in raised about USD 725 million in the Japanese market in 1988 through issuance of bonds against future earnings 1988 through issuance of bonds against future earnings of the park for the next 20 years. of the park for the next 20 years.

The deal was structured in such a way that the investors The deal was structured in such a way that the investors had to bare any shortfall in the revenues and Disney had to bare any shortfall in the revenues and Disney continued to get its royalties without losing any money. continued to get its royalties without losing any money.

It was the Walt Disney brand in which investors showed It was the Walt Disney brand in which investors showed faith and responded positively in the markets. faith and responded positively in the markets.

Tokyo Disneyland is owned by a Japanese company Tokyo Disneyland is owned by a Japanese company Oriental Land Company (OLC). OLC pays royalties to Oriental Land Company (OLC). OLC pays royalties to Disney for using its brand. Disney for using its brand.

In 2004, BCBG Max Azria group, a US-based fashion In 2004, BCBG Max Azria group, a US-based fashion retailer raised about USD 53 million by securitizing its retailer raised about USD 53 million by securitizing its brand which involved bond issues backed by brand brand which involved bond issues backed by brand name. name.

Cont..Cont.. In 2002, DreamWorks raised USD 1 billion by In 2002, DreamWorks raised USD 1 billion by

securitizing copyright in a film portfolio to refinance securitizing copyright in a film portfolio to refinance outstanding credit facilities. outstanding credit facilities.

Paramount in 2004, raised USD 210 million from Paramount in 2004, raised USD 210 million from royalties for films to be made in future. royalties for films to be made in future.

The famous transaction that happened in 1998 where The famous transaction that happened in 1998 where David Bowie was able to secure USD 55 million by David Bowie was able to secure USD 55 million by securitizing music rights of David Bowie’s hits, was securitizing music rights of David Bowie’s hits, was considered to be a landmark deal which started a trend considered to be a landmark deal which started a trend of intangible securitization in the film and music of intangible securitization in the film and music industry.industry.

Fashion products manufacturer Calvin Klein raised USD Fashion products manufacturer Calvin Klein raised USD 58 million by securitizing its royalties on perfume 58 million by securitizing its royalties on perfume brands in 1993 providing and a similar deal was seen in brands in 1993 providing and a similar deal was seen in 2003 when fashion brand Guess raised about USD 75 2003 when fashion brand Guess raised about USD 75 million by securitizing its domestic and international million by securitizing its domestic and international trademark licence.trademark licence.

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