MUSIC FINANCING DOESN’T HAVE TO RESULT IN SELLER RECOGNITION
The extremely trackable and predictable income from streaming is causing financiers to turn their heads and give the music industry the capital and attention it deserves after decades of undervaluing it.
We’ve recently seen a boom in rights acquisitions, primarily centered on music publishing catalogs, which has raised the age-old topic of what music is worth.
It is critical to place the creator at the forefront of any discussion of how music is valued and its worth. For some, selling rights outright may be the best option, but for others, it isn’t. Companies with established catalogs should think about how they may use a short-term loan for emergencies to bring in new artists, buy out catalogs, restructure their firm, and free up equity for the owner.
This can only be beneficial
Considering the multiples being offered and the quantities being spent, it’s evident that the value of music rights is substantial. We should be grateful that they’re being recognized as valuable assets.
Several high-profile companies have paved the way for this value to be realized, laying the groundwork for a stable commercial environment in which rights holders can deal with confidence. However, this is not the only option available, and artists, songwriters, producers, labels, and music publishers do not have to sell rights as a default position.
Trading rights also entails a total loss of control, as well as the loss of any future income growth benefits. Many artists have found out the hard way once someone else buys their catalogs. However, it is now conceivable to not only use rights to raise capital, but also to keep them while prepared to ride the anticipated upside. This is expected as music consumption rises, consumer subscription rates climb, and more platforms come online.
For over ten years, as a financier, I’ve been at the forefront of getting big banks interested in and capable of lending against intellectual property, developing relevant lending systems at both Credit Suisse and RBC.
Banks have historically, and continue to do so today, only lend against music catalogs to the top 1% of the industry. These loans must be greater than $5 million and have a term of fewer than five years. Personal guarantees are required for these loans. They will be cross-collateralized with other assets and additional demands and restrictions.
Interestingly, as global institutional interest in and understanding of the sector grows, we are now at a point where the loan term can be extended. The margin can be reduced to attractive levels, and the assets can be considered so strong in and of themselves that personal guarantees are no longer required.
More appealing loans
In short, loans that were once viewed as a burdensome burden by some are now becoming more appealing, hence posing a lower risk to both the lender and the borrower.
The massive impact of the COVID-19 pandemic on the music industry, with the live music industry, in particular, being decimated over the last year, has prompted a slew of artists, composers, producers, music publishers, and labels to explore selling their catalogs to make up for lost revenue. It’s sometimes all they can do to keep their heads above water.
Negotiating from a position of strength is impossible in these circumstances. Annual royalty income is expected to skyrocket as a result of the abovementioned growth in streaming and the new MMA legislation. As a result, it is critical that persons who generated value have the opportunity to own and profit from that value for the rest of their life.
And to do so without undue and, in some cases, unwanted fuss. Acquisitions frequently result in high-profile media coverage, which purchasers use to promote their products. The rights holder always reserves the right to discretion when taking out a loan. Given the existing investor trust in music rights, there’s no reason why an equitably structured loan option couldn’t be a far better alternative than selling those rights.
Any loan will ensure that the rights owner may maximize their cash flows over the medium term while maintaining their ownership and control. This loan-based alternative, which is backed by royalties and rights income, provides for the release of equity with no personal guarantees or limits on how the money is spent.
The last few years have proved that investors have a strong desire to connect with the music industry, with the focus previously being on acquisition.