David Bowie, a true rock and roll icon, passed away early in 2016. We have since seen many remember him for the musical legend that he was. His legacy in finance, however, lives on.
Yes…finance. It’s actually our duty to remind everyone that he was also a pioneer in the financial industry.
In 1997, at the height of his powers, the English musician became the first artist to convert the rights to his future royalties into an asset-backed security.
An asset-backed security (ABS) is a financial instrument, like a stock or a bond, which will pay you some income but also has some kind of asset behind it that acts as a kind of collateral. Generally the asset behind an ABS is actually a collection of assets, such as mortgages or auto loans.
What Exactly is an ABS?
It works like this. Imagine you take out a mortgage. Essentially a huge, scary, mega loan.
You have to pay interest on that loan on regular intervals (i.e. monthly, biweekly, however you want to slice it). The bank that lends you the money collects that interest. Now imagine that there are hundreds and thousands of people just like you, to whom the bank is lending and from which it is also collecting interest. Each person is connected to the bank through their interest payments. As the bank, you’re in a position of great risk. You’re out for a lot of money and you straight up don’t know if everyone will be able to pay you back.
So…what do you do?
You spread the risk. You do this by creating an asset-backed security. All those people who owe you money – you pool together their interest payments and package it into a product that investors might want to buy. Check out this ABS, you say, pay the sticker price and you can get a piece of these regular interest payments. All of a sudden you have thousands of investors who want to buy this product, you’ve made all or most of your money back and you’ve mitigated your risk. Perfect!
What does this have to do with Bowie?
Well, David Bowie did something super similar. Working with David Pullman of Prudential Financial, Bowie securitized the royalty rights to his music.
To understand how his “Bowie Bonds” worked, we need to understand exactly what he was offering.
In 1997, Bowie signed a deal with EMI Records. The deal allowed EMI to release any and all of the records Bowie had made between 1969 and 1990. For 15 years following the deal, EMI would have the rights to the 25 albums the English musician had produced as well as any live or studio recordings.
At this point most people would be content to sit tight and let the royalty money flow in.
Instead…what Bowie did next would go on to inspire future musicians as diverse as James Brown, the Isley Brothers and even Iron Maiden.
Pullman helped Bowie turn his royalty rights into a security which would pay a 7.9% annual coupon for a 10 year period. The team put out $55 million worth of $1,000 bonds. That means each of the 55,000 investors paid $1000 to receive $79 coupons for 10 years. With a regular bond, you receive coupon payments and the face value of your investment at the end of the holding period…so each investor would have made $1,790 ($79*10 + $1,000). All this would have been paid out of the royalties, the same royalties that Bowie could have simply chosen to collect year after year.
So at the end of that 10-year period, Bowie bonds would have paid out nearly $100 million. Actual figures on his yearly earnings are spotty at best, but given that the legend left a very sizeable estate at the time of his death, it’s pretty safe to say that he made considerably more than $100 million in that time period.
The sale of the bonds allowed Bowie to rack up some serious cash up-front, on the promise that his investors would be paid out of his future royalties.
Funnily enough, though, due to the advent of internet piracy, music streaming and the ever-changing landscape of the music industry, the powers-that-be actually downgraded Bowie Bonds to just-above junk status. Blame Napster, you guys. Luckily they were all paid off in the end though.
It was a serious innovation at the time. Pullman even managed to create a sort of niche for himself, creating royalty-backed securities for popular musical artists. It created quite the rage, allowing fans to own a piece of their favorite rockstars and satisfying Wall Street’s desire for exotic products at the same time.
Bowie put his new windfall to good use.
In the 70’s, Bowie realized that he didn’t own all the rights to his music. His manager Tony DeFries, who he split with in 1975, owned up to 50% for music created up to a certain year. This really bothered him, as the music he had toiled for years to create didn’t completely belong to him.
However…after the Bowie Bond deal went through, the opportunity was there to buy out his former manager. In a deal reportedly worth $27, Bowie was able to buy out his manager’s share and regain complete ownership over his creative works.
It was a great result for a truly legendary musician, one who was able to embrace new ideas and be the first to attempt the unorthodox. He not only inspired other musicians to follow his trailblazing path but he also likely inspired the creation of Fantex, an alternative trading platform that lets people invest in the future earnings of professional athletes.
Funny how things like that come about.