Celebrity Bonds: Investing in Fame & Intellectual Property

A celebrity bond is a type of asset-backed securityFixed Income SecuritiesFixed income securities are a type of debt instrument that provides returns in the form of regular, or fixed, interest payments and repayments of the issued by a holder of fame-based intellectual property rights. Issuers of celebrity bonds receive money upfront from investors in exchange for proceeds from future royalties from the works of art, which are covered by intellectual property rights listed in the security.

Celebrity bonds can be backed by any type of work of art that generates royalties. One example of asset-backed securities is music-based bonds.

Generally, issuers of music-backed celebrity bonds tend to put together the intellectual property of one or more artists whose songs or albums have already stood the test of time. The owner of the artwork obtains money upfront but forfeits the royalties on its intellectual property until the expiration of the securities. However, the owner of the intellectual property retains the ownership of its work.

Bowie Bonds

The most notable example of celebrity bonds is Bowie bonds. The Bowie bonds were issued in 1997 by investment banker David Pullman and were backed by royalties from 25 albums (287 songs) that English singer David Bowie recorded before 1990. Bowie forfeited the royalties from the albums for the life of the bondsBondsBonds are fixed-income securities that are issued by corporations and governments to raise capital. The bond issuer borrows capital from the bondholder and makes fixed payments to them at a fixed (or variable) interest rate for a specified period.. However, he kept ownership of the albums.

The bonds were issued for 10 years with an interest rate of 7.9%. Prudential Financial purchased the bonds for $55 million. Royalties from the albums generated the cash flows to shoulder the interest payments.

Ratings for Bowie Celebrity Bonds

Moody’s, Standard & Poor’s, and Fitch all rated the Bowie bonds. At the time of the issuance, the credit rating agencies gave the highest rating to the bonds. However, in 2004, Moody’s downgraded them to Baa3, just one level above the level of junk bondsJunk BondsJunk Bonds, also known as high-yield bonds, are bonds that are rated below investment grade by the big three rating agencies (see image below). Junk bonds carry a higher risk of default than other bonds, but they pay higher returns to make them attractive to investors.. The rating agency attributed the downgrade to lower-than-expected revenues due to a decline in album sales.

Despite the downgrade from Moody’s and lower album sales, the Bowie celebrity bonds did not default and were liquidated in 2007 according to the initial plan. Upon their expiration, the legal rights on the royalties were transferred back to David Bowie.

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