Concord royalty bond: rising rates challenge music valuations

Securitising future income from music royalties is like sex, drugs and rock and roll: an excessive commitment may damage your finances.

The process has come a long way. David Bowie sold the first royalty bond in 1997 for $55mn. Such deals were worth $5.3bn last year, according to Midia Research. Values have been capped by a rising proportion of low-value streaming within recorded music revenues and, last year, by soaring interest rates.

These are conventionally believed to depress the present value of future revenue streams. To account for this, securitisers usually apply higher discount rates to their valuations of future cash flows.

Hipgnosis Songs Fund, a London-listed trust that has bought catalogues from artists such as Blondie and Neil Young, uses a discount rate of 8.5 per cent. It has held this steady even as interest rates have taken off, to the concern of investors. In October, it used debt to buy its own shares after they fell 30 per cent in six weeks. Its market capitalisation, at just over £1bn, is half of what the company had said its catalogues were worth.

Concord Music Royalties late last month issued $1.8bn in debt at 6.5 per cent backed by its catalogue of more than 1mn songs by artists such as REM and Phil Collins, valued at $4.1bn. The proposed discount rate is 8.25 per cent, less than the Hipgnosis trust.

Backers of the deal say it is wrong to compare an asset-backed security with a publicly traded trust and point to a Hipgnosis asset-backed security issued in August with a discount rate of 7 per cent. They note that Concord plans to issue debt equal to 40 per cent of its catalogue value, compared with 65 per cent in the case of the Hipgnosis ABS.

The deal’s conservative metrics have earned it a higher credit rating than its peers. Concord is a record label and music publishing company with a history of royalty administration. Even so discount rates look unlikely to fall soon. When library valuations are stuck in their old groove, investors should be wary.