Introduction to Securitization

CHAPTER 1

Introduction

What do David Bowie, James Brown, the Isley Brothers, and Rod Stewart have in common? The obvious answer is that they are all recording artists. The financial professional would go beyond this obvious commonality by adding: All of them have used a financing technique known as securitization to obtain funding from their future music royalties. The first was David Bowie who in 1997 used securitization to raise $55 million backed by the current and future revenues of his first 25 music albums (287 songs) recorded prior to 1990. These bonds, popularly referred to as “Bowie bonds” and purchased by Prudential Insurance Company, had a maturity of 10 years. When the bonds matured in 2007, the royalty rights reverted back to David Bowie. Despite the attention drawn to securitization by the popular press because of the deals done by these recording artists, the significance of this financial innovation is that it has been an important form of raising capital for corporations and government entities throughout the world, as well as a tool for risk management.

Prior to the 1980s, the meaning of securitization was used to describe the process of substituting the issuance of securities to obtain debt financing for bank borrowing. Economists referred to this process for fund raising as disintermediation. For example, the former chairman of Citicorp offered the following definition for securitization: “the substitution of more efficient public capital markets for less ...