USC
Live coverage: UCLA vs. Stanford
BUSINESS

David Bowie bonds were a 'revolutionary' business move, and here's how they panned out

Back in 1997, David Bowie wanted some cash. So he parlayed his hit albums into a new spin on securities, offering what became known as Bowie bonds.

The rock legend raised $55 million from the bonds, which were backed by his record label. The bonds secured Bowie's future royalty streams from the copyrights over a 10-year period.

“They were certainly revolutionary at the time," said Larry Miller, director of the Steinhardt music business program at New York University. "The songs that were being secured in the 'Bowie bonds' were the entire body of work that Bowie had recorded before 1990." 

And with a 7.9% interest rate for investors, it was especially attractive to Wall Street, said John Kellogg, assistant chair of the music business and management department at Boston's Berklee College of Music. 

"It was also a sexy type of investment for the staid Wall Street investors, who were usually averse to making investments in the risky entertainment industry," he said. "They felt at that time it was about as secure an investment as you could get in an entertainment company or product."

In February 1997, Moody's Investor Service rated the securitization at A3, the seventh-highest rating.

Prudential Insurance Co. of America, the nation's largest insurance carrier, bought the entire issue.

Bowie used the money for tax reasons and estate planning, said David Pullman, chief executive of the Pullman Group, who orchestrated the bonds and created the first ever securitization of entertainment royalties and intellectual property.

"He understood the value of intellectual property," Pullman said of Bowie.

The "Bowie bond" concept was replicated by a few other artists at the time, such as Ashford & Simpson and the Isley Brothers. But in the Napster era, the sudden decrease in music sales made more such issues untenable.

In 2004, Moody's downgraded Bowie's securitization to Baa3, one grade above junk.

The credit ratings company cited "lower than expected revenues generated by the assets due to weakness in sales for recorded music."

However, the bonds were paid off after 10 years and the ratings were withdrawn, Moody's said in an email.

The bonds for Ashford & Simpson and the Isley Brothers were also paid off, Pullman said.

Today, experts say, it's unlikely that artists would use bonds as a method of quick fundraising based on the diminishing sales of recordings and low royalty rates.

"It’s extremely difficult for someone to try to put together a securitization of future royalty streams of copyrights," Kellogg said. 

It's also just expensive.

"There are just too many other less expensive forms of capital available to artists or music publishing companies,” Miller said.

For more business news, follow @smasunaga.

Copyright © 2016, Los Angeles Times
82°