2010-03-13

IP Securitisation

Corporations around the world are awakening to the fact that intangible assets like patents, trademarks and copyrights are forming a crucial part of business growth and strategies. They not only help in brand building and repelling competition in the marketplace, but can also be considered as financial assets of intrinsic value because of their revenue-generating potential.

In the case of intellectual property (IP) rights, the receivables may include license royalties or other cash flows from the IP. The originator (who owns the receivables) groups and transfers them to a special-purpose vehicle (SPV), which issues securities based on the receivables. The proceeds obtained from issuing debts or equities to the investors are used to pay the originator. Debts issued by the SPV (bonds or the like) are serviced by the receivables. Equity interests issued by it, help the SPV in passing through the revenues produced by the receivables. Recording the security interests in the property ensures the obligation to pay the receivables with recourse to seizure of property in case of a default. In India, guidelines for securitisation are enlisted in the Securitisation Act of 2002.

The benefits engaged in securitisation can be judged from the view point of both the issuer and the investor. From the view point of the issuer, IP securitisation involves transfer of risk, cheap funding, reduced moral hazards, increased transparency, standardisation and a good coupon rate on the bond. From the view point of the investors, securitisation of IP also helps in diversifying into a sector, which is inadequately represented in the fixed income world.

Limitations of IP securitisation include absence of standardisation, presence of limited historical data, high exposure towards manager, grey and illiquid secondary market and possible legal boundaries.

Securitisations are classified according to the types of intellectual property:

• Copyrights are applicable mostly on television/film, music, literary or other artistic deals.
• Patents are concerned with inventive designs and functions.
• Trademarks deal with commercial origins and identities.
• Business plan which concerns different business proposals for different fields.

IP securitisations offer the following advantages to the owner:

• By securitising IP, a greater amount of revenue than loan based on that future revenue, can be obtained. A company can avail of a loan-to-value ratio of as much as 75%.
• Securities help to set up a fixed interest for the duration of the deal and taxes are exempted on the amount raised from securitisation.
• It becomes possible to obtain the capital, without waiting for the royalties to start paying.
• Through securitisation, the inevitability of the bond sale serves an effective insurance policy for the value of future royalties.
• The credit rating of securities can be higher than the originator’s rating because of the quality of the assets, credit enhancement, and the isolation of the assets in a bankruptcy-remote unit.

Though the unique traits of IP inflicts challenges and difficulties in the process of securitisation, such securities form a viable financing method of enabling IP right holders to receive considerable sum of money in exchange for the right to receive royalties over an extended period. A careful evaluation of the value of the royalty, and the risks involving the market forces, which might affect the valuation of the IP, is necessary for the securitisation to be successful. But with due precautions, identifications and evaluations, securitisation can be a valid process of monetizing IP.