So, last week I came across something that really fascinated me in the fixed income world.
Something that was a coalescence of celebrities and finance. Typically, I am not a person who goes gaga over celebrities. I may take a fancy if they are a kind human being (There are very rare humans who give away the more they ‘get’) but that’s about it. But I do have a soft side for ones who’re starkly brilliant than their contemporaries or those that take a risk and do something no one has ever done before. It requires guts, you see.
Personally, being extremely “Indian” in my outlook, western music has never been my cup of tea. So, I won’t claim to have heard his songs but something he did has irrevocably made a mark in my mind.
Born on the 8th January of 1947, in the southern London district of Brixton, David Robert Jones or better known by his stage name, David Bowie was one of the world’s most pioneering and influential musicians in the 20th century. His record sales were actually estimated at around $100 million (Rs 10 crore) worldwide, rendering him one of the best-selling music artists of all time. Upon his death in 2016, he was placed in the list of 100 greatest artists of all time by the popular magazine ‘Rolling Stone‘. He was worth an estimated $230 million (Rs 1610 crores) at the time of his death.
Phew, what a run. Living embodiment of the popular (Cliched if I may say so) Latin phrase “Veni, vidi, vici”. For those of you needing a translation like me, “I came, I saw, I conquered”.
Apart from being such a musical savant, the depths of Bowie’s financial and business acumen have also been mostly unexposed, if not forgotten. He paved a new way for the advent of what is now known as ‘Celebrity Bonds’ in the finance world, something no one had ever done until then.
To be fair, this was not his own creation, so the credit should not solely go to him but let me remind you that reputation is what gives an artist his potency. Had this gone awry, which was quite probable, he would have been in the spotlight, receiving criticism.
Anyhow, without attributing anything to anyone (Credit to whomsoever due.), let me expound on these Bonds.
Dubbed “Bowie Bonds”, these raised an estimated $55 million (Rs 550 crores) for the English singer-songwriter when issued in 1997. These were $1000 denominated self-amortizing (A type of debt where the principal keeps declining every period; Paid off in tandem with the Interest) bonds, with an interest rate of 7.9% (Greater than the then average US treasury yield of 6.35%) and maturity of 10 years. The bonds increasingly became appealing to investors because not only were they perceived as a sound and steady long-term investment, but they were also a lucrative opportunity to own a piece of their favourite Rock-star, however quirky.
So, what’s the deal with these “Bowie Bonds”?
In essence, Bowie created an asset backed security (A financial debt instrument that is collateralised by/dependent on a pool of underlying assets – typically illiquid, but income generating.) that acquired its value from the billions of royalties he had negotiated to receive in the coming years from the sale of any/all the albums he had made prior to 1990 or any live performances. So, because of these bonds, he ultimately forfeited any royalties for the life of the bond and gave his creditors (Investors) a chance to gain receipt of a portion of these royalties themselves.
The vital innovation laid in using intellectual property to back securities (Used as collateral), the first of its kind. (Intellectual property are inventions that are solely and primarily accredited to human intellect. Patents, Trademarks, Copyrights are all examples of legal protection for such ‘Intellectual Property’ so future theft can be prevented and to maintain exclusive ownership of such creations.)
How did this come about?
Bowie, during his initial recording deals, did something no one had ever believed enough in themselves to do before. He knew his albums would be worth more in the future and accordingly brokered a deal to control his master rights. (Controlling the master rights essentially means you have control over what is done with the song or album). He then turned around and licensed them to record labels for release and distribution. This became a key factor in the creation of Bowie bonds. (For all us Gen-Z youngsters, this is the basis of the whole feud between pop star Taylor swift and record executive Scooter Braun, which had Justin Bieber and other celebrities coming in support of each party.)
Bowie had been contemplating over offers after having decided to sell his existing record masters, when investment banker David Pullman entered the picture. The latter managed to convince Bowie and his business manager Bill Zysblat on this unprecedented investment vehicle to generate cash from Bowie’s extensive back catalog (Music he had previously recorded and released in the past). After consideration, Bowie decided in favour of packaging and selling these royalty rights as opposed to slowly receiving the royalties over a long period.
Then prior to issuance, Bowie licensed his catalog to EMI record label for a 15-year deal bringing him $30 million for about 25 albums released between 1969 & 1990. This deal was further used as “Credit enhancement” for the Bond.
These first of a kind, artist-backed bonds were then underwritten by Pullman’s firm Fahnestock & Co. To get the deal off the ground, Pullman had the bonds rated by all 3 credit agencies at the time, Moody’s, Standard & Poor’s, and Fitch, which gave the bonds investment grade rating, indicating that Bowie did not present any risk of default.
Soon in a private transaction, these bonds were sold at a price of $55 million to the investment division of financial giant, Prudential Insurance company.
Forget about the tax benefits (If any), Bowie also stood to gain from the greater present value of receiving cash way before the royalties actually came in. We do not really know much about how he used the money that was raised, but a lumpsum would’ve been quite handy to expand his income stream from arenas outside the music industry.
But as all good things do, this did not last. The arrival of the 21st century also brought with it a soaring popularity of online file-sharing platforms. As we now know, this was more easily accessible and was a more cost-effective recourse when compared to record stores. Soon enough, with music fans drifting away from stores, album sales became depressingly low. The music business was heading for a tumble. And as expected, these bonds whose values had been heavily dependent on royalties tanked. Moody’s in 2004 downgraded the rating on the Bonds from an A3 to Baa3, one notch above junk status.
However, the Bowie bonds matured and were redeemed in 2007 as originally planned, without default, and the rights to the income from the songs reverted to Bowie. So, no harm done.
But hold on. I’m not done. There’s a twist.
This was not entirely an unanticipated change as the financial opportunist made evident in a 2002 interview with the New York Times, “The absolute transformation of everything that we ever thought about music will take place within 10 years, and nothing is going to be able to stop it. I see absolutely no point in pretending that it’s not going to happen. I’m fully confident that copyright, for instance, will no longer exist in 10 years, and authorship and intellectual property is in for such a bashing.” He noted that in the interim, artists should take advantage of the ability to control the distribution of their music, and to make some money off of it.”
And yet in another testimony of his prescience and financial resourcefulness, he took advantage of the penultimate years of the musical records era.
As for the banker, David pullman who then became quite popular for being the architect of this unique product, went on to form his own firm, and continued to create more such “Pullman bonds” with other renowned artists.
Bowie died on the 10th of January 2016, having ailed from liver cancer for a while. He was known to have kept working relentlessly on his final album ‘Black-star’ despite the disease worsening. A true epitome of a legend, musical and otherwise.
Bowie’s unusual mismatch of pupils of his eyes, was a seemingly unfortunate aftermath of a teenage fistfight. It later went on to become his most iconic feature.