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Bonding with the music biz.

HOLLYWOOD - Ethan Penner took the stage at the House of Blues here last week and sang "Born to Be Wild" in front of some of the entertainment industry's top execs.

Penner wasn't trying to land a recording contract. He used the platform to drum up enthusiasm for his company's plan to lend money to the music, film and TV industries based on the future income of projects or assets. In other words, the loans will be repaid by revenue streams such as music royalties, TV syndication fees or gross profits on films.

Underlining the message of the lunch was the company's catch phrase: "Access tomorrow's cash flows for in vestment today."

The presentation was the latest move by Wall Street financial institutions to tap into the large sums paid to singers, actors and directors, and to offer bonds backed by an entertainer's assets and future income.

Penner's outfit, investment banking firm Nomura Capital Entertainment Finance, bowed the entertainment-lending division during the Sept. 29 HOB gathering. The company hopes the new arm will make as much as $1 billion in its first year with the unusual loans.

As the Japan-based Nomura has done in the real-estate financing business, individual loans will be bundled into groups, transformed into asset-backed securities and then sold to investors. Parent Nomura Capital boasts of providing $20 billion in capital to the commercial real estate industry.

To help it navigate the shark-infested waters of the music industry, Nomura has entered into a partnership with Irving Azoff, chief of the Revolution label and manager of the Eagles. Penner was introduced to Azoff a few years ago after hiring the Eagles to perform at a sales conference attended by bankers and real estate developers.

Penner also has tapped veteran entertainment banker Irene Romero as a consultant and hired Casey Wasserman, grandson of former MCA Inc. chairman Lew Wasserman.

Nomura's entry follows Bear, Stearns & Co.'s interest in making similar deals and the tapping of senior managing director Lisbeth R. Barron to lead its industry charge. Barron has several transactions in the works, both in the recording and film industries.

While Nomura says it will be the principal investor in the loans it makes, Bear Stearns intends to raise the money from third-party investors.

"I've seen a definite momentum toward these type of loans," Barron says. "We've been approached, and we've been approaching people, who are both companies and individuals looking for capital upfront that would securitize future revenue streams."

Crosby, Stills & Nash have a deal in the works that will lead to bonds being issued in the group's name and backed by its album library, which it hopes will raise $20 million. But the CS&N bonds aren't likely to become available from a local broker. The plan is to sell them off only to institutional investors.

The Rolling Stones, Prince and Nell Diamond also are said to be weighing packaged financing offers.

CS First Boston is getting into the business with investment boutique D'Loren & Levien, whose execs have been meeting with major industry players over the past several months. It also has partnered with Charles Koppleman, the former chairman and CEO of EMI-Capitol Music Group (who was dismissed in May) to locate prospects.

Wall Street's newfound interest in the music biz was piqued this year after Prudential Insurance Co. of America' purchased all $55 million of the 10-year notes backed by David Bowie's catalog and future revenues.

The so-called Bowie bonds were rated a desirable single-A-3 by Moody's Investors Service - partly because music giant EMI licensed the back catalog for 15 years, which was put up as collateral to Prudential.

The bonds also are based on 25 albums Bowie recorded before 1990, and have a 7.9% coupon, which beats the normal return of most asset-backed bonds by at least half a point. Its 6.37% yield also is better than the rate on 10-year Treasury bonds.

At Nomura, Penner's goal is to tweak the Bowie-bond concept.

Everybody in the pool

Instead of offering individual securities based on each entertainer's future prospects, he wants to pool large numbers of loans into diversified portfolios.

He is credited with pioneering the process in the real estate world and Penner hopes to tap into the vast future income flows that rock stars, actors and individual studio execs anticipate.

The loans would be repaid not just by music or publishing royalties, but by revenue generated from TV or film libraries. A producer's percentage of the gross from a successful film could also be leveraged.

"I'd be disappointed if, by next year, we weren't running at $1 billion a year (in loans)," Penner says. Nomura has commitments to make nearly $70 million in loans that will be resold as asset-backed securities.

The company also is willing to make more traditional loans to entertainers, based on the earning potential they demonstrate with record or film contracts. Like the Bowie bonds, where the star got a chunk of the money from the sale upfront, Penner's and Bear Stearns' deals will allow entertainers to get cash upfront based on future earnings potential of their past works.

But the Bowie deal - which has become the blueprint for future pacts - had some novel issues because it was the first time that record royalties and copyrights were securitized. "I know there have been movie deals, but those structures are different," says Richard Rudder, head of the securities practice at New York-based law firm Willkie, Farr & Gallagher, who structured the Bowie deal.

Rudder concedes that many institutional investors are wary of new configurations of asset-based securities - especially with the name of a rock star, actor or director on them.

Unfounded skepticism

But he says the skepticism is unfounded. "The buyer of the paper, Prudential, has one of the most sophisticated departments anywhere," Rudder notes. "The rating agencies know what they're doing. It wasn't something that was wild and crazy because these people don't get paid to be that way."

The Bowie deal was tricky, as it involved overlapping laws, specifically the Uniform Commercial Code and the laws supporting it. And because the asset was intellectual property, copyright laws also were involved.

Perhaps the lures of rubbing shoulders with rock stars and being able to say at parties that you own an artist's catalog helped motivate a group of managing directors at Lazard Freres & Co. into backing 32 Jazz, a new jazz label founded by producer Joel Dorn, earlier this year. (The name is a reference to the jersey numbers of basebali's Sandy Koufax and basketball's Earvin (Magic) Johnson.)

"Financial companies are getting into the music business because it's become a respectable industry and a good investment," says Robert Webster, senior manager of KMPG Peat Marwick. "Plus, it can be a thrill for someone to tell their friends they have a 'piece' of a celebrity."
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Title Annotation:Nomura Capital Entertainment Finance
Author:Sandler, Adam
Date:Oct 6, 1997
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