Bowie Bonds: 15 years later

David Bowie has always been known as a groundbreaker in the arts, for he is constantly pushing the envelope on music and looks. In 1997, he once again surprised the world, but this time in the financial market. With the help of banker David Pullman, he launched an investment product that consisted in transforming intellectual property rights into an asset that could be used to back a security. Roughly saying, Bowie "mortgaged" the revenue he was expecting to obtain in the forthcoming ten years from all the music he composed and recorded until 1990. We are talking about very popular songs such as "Let's Dance", "Ziggy Stardust" and "Space Oddity". The papers became known as the Bowie Bonds and this post is about what happened to them.

In exchange for the bundle, Bowie and his banker asked for an investment of US$55 million, with a 7.9% interest rate, guaranteed by EMI, which was then the artist's record label. They got the whole money from Prudential Insurance Co. It was like taking a loan, but without much of the hassle and heavy fees and taxes that usually involve a loan of this caliber. The papers were celebrated in the market and also by music artists, who saw in this intellectual property right securitization mode a new possible source of income. James Brown released his own bonds months later - also assisted by David Pullman. Other banking companies started approaching artists worldwide in hopes of developing similar products.

For Bowie, it was all gain. He used part of the money to buy the copyrights of some of his earliest songs, that were owned by Tony deFries, his former manager. But for Prudential, the timing could not be worse. In 1997, the papers were graded triple-A, partly because Bowie was one of the most valuable British artists, with a net worth of 550 million pounds according to Business Age Magazine (the magazine no longer exists, but you can find the information in this article by Jennifer Sylva). Right after the signing, the world was taken over by internet piracy. Record sales dropped and, in 2004, Bowie Bonds were reevaluated by Moody's Investors Service at Baa3, almost falling into the "junk bond" category. According to the Wall Street Journal, in 2005, bonds backed by music sales represented only 1% of all asset-backed security market.

A long time passed until this August, when Goldman Sachs announced a US$300 million bond backed by the catalogues of Bob Dylan and Neil Young. With iTunes Store thriving as a hot spot for music sales (over 20 billion songs downloaded since 2003, according to Apple Press), the product was expected to be, at least, interesting. But no investors showed up to buy it. The Bowie Bonds were a promising venture in 1997, but the downfall of the music industry as we knew it devaluated the idea. Now, it is seen with distrust by the market (defined as an "esoteric" product by The Guardian). The future of these bonds depends on how the industry is going to perform from now on. The numbers from the iTunes Store are giving new breath to the business. But, for investors, they are still not convincing enough.