Sure, David Bowie was the most inventive rock star of his era. And yes, he matured gracefully (more or less) into an elder statesman of pop, working with younger independent acts and capping his late career with a pair of moving, reflective LPs.
But did you know he also left his mark on the world of asset-backed securities?
OK, so the achievement doesn’t quite rank up there with albums like Low and Ziggy Stardust. But in 1997, Bowie, who passed away from cancer Sunday at 69, did manage to kick off a brief financial craze after becoming the first musician to sell bonds backed by the royalties on his catalog.
Bowie was unusually well-placed to pull off the deal because, unlike most artists, he owned the rights to the bulk of his songs. He had considered raising cash by selling off the catalog entirely. But a financier named David Pullman, who knew Bowie’s business manager, suggested trying the bond route. Wall Street was falling deeply in love with securitization, and bankers were pooling all manner of loans and other assets into complicated investments to be resold. The income stream from Bowie’s ever-dependable album sales seemed ripe for the same treatment.
Bowie “made this decision within less than a second,” Pullman told me when we chatted Monday. “Instead of asking questions, he says ‘Why haven’t we started yet?’ ”
Thus, the “Bowie bond” was born. The rocker inked a licensing deal with the British record label EMI to rerelease 25 albums recorded between 1969 and 1990 in return for a hefty royalty rate, which was used to back a set of 10-year bonds with a 7.9 percent interest rate. The Prudential Insurance Co. paid $55 million for the whole offer.
The deal had a few major advantages for Bowie, Pullman told me. First, it gave him a big upfront payment that he could invest elsewhere without permanently selling the rights to his music, which would return to him once the bond was paid down. “These songs were his babies and his legacy and he wanted his family to have it,” Pullman said. By securitizing his royalties rather than using them as collateral for a bank loan, Bowie also avoided any personal liability for paying back the debt. Meanwhile, some have suggested that issuing bonds may have saved Bowie taxes that he would have had to pay had he sold his catalog outright, though Pullman disputes this.
Either way, others took notice. In the years that followed, musicians and bands like James Brown, the Isley Brothers, and Iron Maiden imitated Bowie with their own bond issues. Perhaps more importantly, the Bowie bond popularized the notion that any intellectual property could be packaged into a security. Before then, nobody had “even ever talked about” it, Pullman said. Movie studios were especially enthusiastic. In 2002, for instance, DreamWorks closed a $1 billion securitization deal based on future revenues from its films.
Of course, we all know what happened to the music industry in the early 2000s. Piracy decimated album sales, and soon song-backed bonds looked like a less desireable investment. In 2004, Moody’s downgraded its credit rating on the Bowie bonds to just above junk, though ultimately they never defaulted, paying off after 10 years. Digital downloads helped revive the labels’ fortunes somewhat, and in 2007, a private equity investor nearly bought EMI with the intention of securitizing a good chunk of its back catalog. But the financial crisis scotched that plan.
So, how influential was Bowie’s greatest financial hit? On the one hand, the idea of securitizing intellectual property has never taken off the way some hoped. On the other, Bloomberg points out that a large market has bloomed in “esoteric” asset-backed securities, a catchall term for bonds based on things like time-share rentals and the money earned from stud race horses. “Bowie’s bonds were as groundbreaking as his music,” one money manager told the news service. “Not only were they followed by a number of other artists, but they set the template for deals backed by a whole range of assets.”
Again, that’s not going to make anybody forget Heroes. But as far as quirky biographical footnotes go, it’s not bad.