How do you combine a career in structured finance with trips to the Cannes film festival and seats at the best soccer matches in Europe? Dorian Klein, managing director of European structured finance at Merrill Lynch in London, makes it part of the job. For the past year and a half his team has worked with intellectual property rights, pulling off a major film rights securitization last year.
Remember David Pullman's $55 million Bowie bonds (a securitization of the singer's future royalty income) launched at the beginning of 1997? He had been touted as putting this sector on the map. "A lot have tried but few firms enter as competitors," boasts Pullman, managing director of Pullman Group. "It takes time to develop this sort of asset class." Pullman concedes that Klein's film securitization was one of the rare few successful deals that was not executed by his firm.
Merrill's team is a much bigger operation than the boutiques (like Pullman's) doing these sorts of deals, so many securitizations are simply too small and risky to be worthwhile. "Movies and sports are the two things that have the combination of big size, interest, marketability and liquidity that would be appropriate for us," says Klein, whose team aims for deals larger than $100 million.
Before starting at Merrill Lynch in 1994 Klein worked at Bankers Trust heading the asset-finance department. He worked his way through sectors - aircraft, transport, ships - but always did structured finance. He believes understanding this is more important than being an expert in the industry: "The techniques you use are very similar. You will analyze cash flows, models and ratios if it's an aircraft, ship, or movie library."
Last year Klein executed the first true securitization of film rights for Italian holding company Cecchi Gori. It is considered a true securitization because it is based on an existing film library rather than future sales or film production. One of the films in the library is La Vita e Bella(Life is Beautiful), a tragi-comedy about a family surviving in a Nazi concentration camp whose star is Italian actor Roberto Benigni. The film won two Oscars. The deal execution won it best asset-backed (receivables) in Euromoney's deals of the year. The deal had a number of things going for it, including the diversification of the library, the low product risk and the large portfolio.
Klein's team also led securitizations for Italian football team Lazio, which not only enabled the team to go public but to buy two new star performers. A securitization was also done for Spanish team Real Madrid, based on a merchandise sponsorship contract with Adidas. Another deal was done for football team Fiorentina, also owned by Cecchi Gori, which was backed by season-ticket sales. "The team has a fanatical following, which makes it very good for this kind of deal," says Klein.
Attending soccer matches is in the line of duty for Klein. He enjoys them himself but says clients' enthusiasm for the sport can lead to problems. "Some people we market to are such big fans that it has a perverse effect. They are not taking it seriously. We have to be careful not to overplay the fun part of the deals because it is a big business."
Valuing assets is another challenge for Klein. How do you determine how many fans will follow a football team in a particular season? "The assets were not typical. We had to reinvent the wheel a little bit on some of these issues to convince lawyers and ratings agencies," says Klein. One method used for the Cecchi Gori film securitization was giving it a high "firesale" value and collateralization pool. Sports teams' performance may fluctuate wildly and films can quickly fall out of fashion. "Continuity is very important. The Spice Girls would be very profitable but much riskier than Elton John," he says. Sports teams and film libraries provide continuity to a greater extent than music can, Klein believes.
Intellectual property rights securitization "is a total people business", he says. "The biggest challenge is dealing with personalities. It is not a business that is suited for rigid capital markets." On the other hand: "A lot of these people by nature are creative, not resistant or bureaucratic" says Klein. "The big bosses tend to take a more hands-on approach to this aspect of their job."
Klein is optimistic about the development of the business. One-third to half his budget is dedicated to it for 1999. He has not entirely ruled out music securitizations and hints that tour securitizations might be part of the next wave. One deal suggested to him was a millennium tour - it would involve several artists, which would diversify the risk and be a large enough spectacle to make it worthwhile for the firm. It was estimated to be a $200 million project in terms of financing which, Klein says, "started to sound interesting".
A highlight for Klein last year was when Merrill Lynch played Fiorentina. Unsurprisingly, Merrill lost both games but there are plans for a rematch next spring. Alex Mathias