After issuing a $55 million private bond placement for David Bowie, investment banker David Pullman was sitting in the Motown Cafe in New York admiring the ambiance. And sure enough, the founder, chairman and CEO of the Pullman Group got an idea.
“These are legends,” he says. “You know how if you go to a concert now you hear two or three hit songs from a group? James Brown had 98 Billboard (hit) records. The Isley Brothers had 51. Marvin Gaye had 66.”
Thus Motown’s bond craze began. Each of the above artists wound up issuing bonds through Pullman, receiving instant cold, hard cash, tax-free, on their future royalties based on their catalogs of songs.
The bonds are rated a respectable “A” and must be repaid over about 10 to 20 years at approximately an 8% interest rate. Perhaps most importantly, the artists retain copyright of their work.
“With this market, people are probably doing a lot worse there than they are with these bonds,” says Lee Phillips, senior partner at Manatt, Phelps & Phillips. “The chances of the bonds not paying off are relatively remote.”
But some financial analysts are wary, warning that if the future royalties of the artist don’t pan out the way they’re expected to, investors — currently all institutional, made up mostly of insurance companies and fund managers instead of individuals — will be the ones left holding mama’s brand new bag.
“The problem is that contracts that generate revenues in the music industry are not like mortgages that are securitized all the time,” says Pauline Stevens, partner at the law firm of Morrison & Foerester. “There’s a lot more ways you can lose the income stream.
“I think it is a viable financing mechanism, it’s just that maybe the industry hasn’t matured enough to do it very well yet. A bond that has a double- or triple-‘A’ rating here must have the same value as one in any other industry.”
Since Pullman only started issuing these kinds of bonds with Bowie in 1997, the future outlook of the investment has yet to run its course.
Pullman assuages such concerns by referring to technology’s role in the ever-expanding royalty marketplace. When music downloading on the Internet becomes a revenue generator, more money will start flowing into artists’ coffers. As more cable channels pop up, more background music for shows and advertisements will be needed.
Who’s up next for a bond issue? Pullman won’t say, although everyone from Michael Jackson to Tupac Shakur to Joan Jett has been the target of speculation. But he does mention that he wants to be careful not to overload Wall Street with one bond issue after another.
“We announce deals one at a time,” he says. “We don’t want one to cannibalize another.”
The bond du jour is Marvin Gaye, announced late last year with the crooner’s estate. Bonds will be issued based on the more than 200 songs in his catalog, including “Sexual Healing,” “Mercy, Mercy Me” and “What’s Going On.” Proceeds are estimated to be in the eight-figure range, although Pullman once estimated the long-term value of Gaye’s catalog at $100 million.
“We only do this to empower the creators and artists, we don’t do this for the companies,” Pullman says. “The majors and studios have access to capital already.”
Before Gaye, Pullman worked with the Isley Brothers, with a catalog including “It’s Your Thing” and “Shout,” on another eight-figure bond issue. Recently, he won, via a judge’s decision, the catalog of bankrupt Ron Isley for $4.8 million, beating singer Michael Bolton’s bid of $5.3 million.
Bolton was trying to buy the catalog to clear what he was ordered to pay after the judgment in a federal appeals court last year that upheld the ruling that Bolton plagiarized song “Love Is a Wonderful Thing” from the Isley Brothers.
The financier is no stranger to the courtroom. Pullman is involved a in lawsuit with Prudential Securities and music industry exec Charles Koppleman’s CAK/Universal Credit Group, both of which he charges with mimicking his methods. Last month, the New York state Supreme Court agreed to hear Pullman’s case.
“People try to copy us now,” Pullman says. “Next thing I know everybody and their brother has gone out and issued these kinds of bonds.”
Two other banks have begun securitizing catalogs. Nomura Capital Entertainment issued a bond worth $15 million on behalf of Rod Stewart and the Royal Bank of Scotland issued one for $90 million on behalf of the Chrysalis Group.
Others who have taken out bonds with Pullman include artists Ashford & Simpson (“Love Don’t Make It Right,” “Don’t Cost You Nothing”) and the songwriting team of Holland-Dozier & Holland (“Stop in the Name of Love,” “Reach Out I’ll Be There.”)
Pullman is looking to expand his bond issues into related fields, like score writers, and creators of film and television music. He believes that any creative talent — from actors to directors to producers with gross points — can benefit from securitization of their future royalties.
“It’s the ultimate asset class — entertainment as part of the intellectual property market,” Pullman says. “It’s tangible. You can see it and hear it. People get it right away.”