Is this the biggest show in town?

"On my desk I have the documents for securitizing the writers' and publishers' future royalty income on a set of record masters. And in my briefcase I've got one which deals with the royalty stream from an author's copyright."

So says David Pullman, head of the structured asset sales division of Fahnestock in New York. It's not quite a boutique ("The bank employs 1,400 people," says Pullman), but neither is it well known. What put it - and him - on the map was the $55 million deal he arranged for rock star David Bowie at the start of 1997. This deal is regarded as the first securitization of future royalty income, and is based on a portfolio of 300 of Bowie's tracks. But while such deals attract the headlines their proportion of total securitizations remains relatively small. According to a March 1997 report from consultants Arthur Andersen the total volume of securities backed by intellectual property assets issued since 1991 stands at just $1.6 billion, and many of these were in part backed by tangible assets, compared with $200 billion total securitized issuance in 1996 alone. The many problems involved in securitizing intellectual property mean that a market take-off is still some way off.

In April this year, Pullman followed up with a deal for songwriters Edward and Brian Holland and Lamont Dozier. For those who have never heard of them, they are the creative talent behind the Motown record label. They have registered 70 billboard hits over their career - more than any other writer - and are responsible for hits such as The Four Tops' Baby I need your loving, Marvin Gaye's How sweet is it to be loved by you, and Stop in the name of love by the Supremes. Overall, their entire assets have been valued at over $100 million. Pullman put together a deal which draws on just one aspect of those assets, their publishing rights, and it centres on a $30 million loan extended to the songwriters by Fahnestock, which was then repackaged as a securitized private placement. And unlike the Bowie deal, the Holland, Dozier and Holland deal is based purely on the assets - Bowie's benefited from a guarantee from his record company, EMI.

Pullman has also been working on the possibility of structuring a similar deal for songwriters Crosby, Stills and Nash, and says that he has many other music catalogue deals in the pipeline. But music is not the only avenue he is considering. Other intellectual property assets which he feels are ripe for securitizing include the television syndication rights to various programmes - the one he is linked to is the hugely popular US comedy show, Seinfeld, which drew in a record 108 million American viewers for its final episode in mid-May. The end of the original series should be no barrier, though. "Desi Arnez sold his rights to I Love Lucy for $2 million back in the 1960s," Pullman points out. "But it's so popular that the series is still being shown." Book royalties are another possibility. "Look at authors such as John Steinbeck. He died in 1968, but his book sales still bring in a steady revenue."

The Bowie deal set off a wave of excitement and hype about how the securitization of intellectual property would take off. Other banks joined in, but, in the music field at least, the Holland, Dozier and Holland issue was only the second which he has managed to conclude.

Others have had similar difficulties. At a conference in June last year on high-yield bonds and leveraged finance, BT Alex Brown's head of securitization, Lemy Gresh, enthused about the prospects for using intellectual property as assets. He already had several deals in mind, which he won't make public. But by the end of the year he was less enthusiastic.

Nomura Securities in the US is also finding the going tough. In August last year, the Japanese bank announced that it was to set up an entertainment-finance division, and Ethan Penner would run it. He had established his reputation in asset-backed securities at Morgan Stanley, and at Nomura was responsible for the success of its real-estate finance division, which had lent out over $26 billion to the commercial real-estate industry, warehousing the loans and securitizing a portfolio of them. This was also the plan for the entertainment finance division.

Penner and his team of about half a dozen bankers planned to warehouse loans to musicians, writers, sports stars, independent movie companies and others, to the tune of up to $1 billion. In September news of their first potential deal was leaked to the press - a loan to rock star Rod Stewart, a deal which Pullman says he had declined earlier in the summer. Towards the end of 1997 they were still confident of issuing a package of loans worth $500 million by the end of the first quarter of this year; by February, that had been reduced to $250 million. At the end of May they were still some way off. This is now explained as being the period in which all the groundwork was laid. "We have been researching the industries we want to be involved in, and creating a series of databases in music, films, writing and publishing income, and the like," says Steve Williams, executive vice-president in what will shortly be renamed the Capital Company of America. "So we have not been actively marketing ourselves in that period."

Pool of intellectual assets

There are distinct benefits to securitizing intellectual property in this way. One is that the diversification of assets takes away the risk of investing in single names. Second, it allows for a broader range in the amount lent - the general feeling among bankers is that stand-alone deals of less than $20 million are not viable. "By collecting the loans in a pool we are able to identify a broader range of opportunities which simply could not be done as stand-alone deals," says Williams.