(Bloomberg) -- A subsidiary of KKR is marketing its first-ever music-royalty securitization to bond investors this week, giving money managers the chance to buy a piece of a diverse catalog of 65,000 songs including hits from The Weeknd, Stevie Nicks, and Childish Gambino.
KKR Credit Advisors is selling more than $732 million of asset-backed securities supported by publishing and sound recording royalties, as well as recoupment of artist advances, for a portfolio of songs valued at more than $1.1 billion, according to a presale report from Kroll Bond Rating Agency. The offering is being led by Credit Suisse and KKR, and Kroll expects to give the deal a grade of A, the sixth-highest rating.
This is only the latest bond to be backed by music rights and royalties. David Bowie pioneered similar deals in the late 1990s when he securitized royalty streams from his catalog, in a model that was later replicated by musicians including James Brown and The Isley Brothers.
Read more: The Who, Tim McGraw Music Rights Back New $304 Million Bond
More of these deals may come after a wide range of performers, from John Legend, Bruce Springsteen and Bob Dylan to Shakira have sold all or some of the rights to their catalogs. Companies or investment vehicles often buy the assets, and these bonds are a way to help finance their purchases.
The latest music ABS sale comes amid a very active period for bankers bundling unusual assets into bonds. They've sold securities backed by everything from fast food franchises to fitness-center fees, at the fastest clip since the global financial crisis as investors chase yield and inflation protection.
The catalog underlying the transaction was owned by Kobalt Capital Limited and administered by Kobalt Music Publishing, an independent music-rights company. Initially Kobalt will be the primary administrator for a large majority of the catalog.
The proliferation of streaming will only help the performance of the bonds, Kroll analysts said. “A growth in streaming higher than initially projected in the valuation assumptions could lead to an increase in cash flows into the transaction,” they noted.
However, under federal law, there is a small risk that certain artists in the catalog can recapture ownership of their song copyrights earlier than anticipated, particularly for older songs, Kroll said. This could theoretically impact cashflows for those songs, but Kroll took this risk into consideration when rating the securties, the firm wrote.
There are seven outstanding infringement claims against songs in the portfolio which have the potential of impacting cash flow in the future, Kroll said. Two of those claims are against Taylor Swift for her 2014 hit “Shake It Off”, which has been accused by two separate songwriters of lifting lyrics from other songs, Kroll said.
More than 11% of the songs in the portfolio have been in the Billboard Top 10 music charts, the rating agency said.
Relative Value: Agency MBS
- Goldman Sachs Asset Management moved its underweight exposure to agency MBS closer to benchmark levels, adding exposure to the bonds at attractive levels amid recent weakness, strategists said in the firm's weekly fixed-income note
- That said, analysts remain underweight in light of impending Fed quantitative tightening
- “For context, the Fed's agency MBS holdings have increased by 97% since March 2020, and the central bank holds 33% of the outstanding agency MBS universe. We think an unwind of the Fed's presence in the market will be a headwind to performance moving forward”
Quotable
“CMBS players are considering what the effects of higher rates are on commercial real estate properties,” Lea Overby, head of CMBS research at Barclays, said in an interview. “There will be a higher cost of servicing debt. A knock-on effect will be the lowering of transaction values. There may be higher debt service, which otherwise could have been used for tenant improvement. So much of CRE does need capital going into properities, so in many ways it's the wrong time to have rates rising.”
What's Next
ABS transactions in the queue for next week include World Omni (prime auto), Marlette Funding (consumer loans), Mercury Financial (credit card ABS), and GBX Leasing (railcar ABS)
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