The first chord played in the securitization of music royalties was in 1997, with a $55 million offering of what became known as the "Bowie Bonds" transaction. This was an investment-grade securitization of royalties from 25 David Bowie albums, all recorded prior to 1990. In the next two years, an additional four transactions came to market in the sector. They were secured by royalties from libraries including, among others, those of James Brown, Iron Maiden, and Ashford & Simpson. Together with the Bowie Bonds, there were five deals that totaled $150.5 million in issuance. It would take more than 20 years before the next intellectual property-related music royalty asset-backed securities (ABS) transaction came to market, in 2021. This was followed by another three in 2022, totaling nearly $3 billion over this two-year span (see chart 1).

S&P Global Ratings believes the recent renaissance of issuance in the sector--with more issuance forecast over the next few years--is related to technology. File sharing/piracy caused the long downcycle, while music streaming brought the industry back to life. (The specifics of these structural changes are discussed in more detail below.) Renewed market interest is at least in part due to the continued growth in recorded music generation since 2014 and the diversification of funding sources. Perhaps the largest driver, though, is the relative stabilization of cash flows associated with music streaming, which makes the assets more suitable for securitization.

Chart 1

Given the expectation of additional issuance volume in 2024 and beyond, we are sharing our opinions on the various risks that a music royalty transaction might face.

What Are Music Royalties?

The moment a song is written, it is owned by the songwriter, who then files a publishing copyright to protect the harmony, melody, and lyrics of the music. Then, when the music is recorded, a recording copyright is created. Music royalties are generated when copyright holders--songwriters, composers, recording artists--and their representatives license their ownership rights in a musical work to a third party so that it may be reproduced or distributed. Each time a copyrighted musical composition is consumed or played or duplicated, there are both publishing and recording musical royalties owed.

Chart 2 describes the different types of music royalties.

Chart 2

The Music Industry Faces Complex Risks

While the consumption of music is not considered to be cyclical, the music industry faces complex risks outside of those posed by the larger economy. These include industry and technology changes.

A convergence of multiple factors drove a prolonged period (from 1999 through 2014) of significant decline in global recorded music revenues. This reshaped how music was created, consumed, and monetized. The emergence of Napster, a peer-to-peer file-sharing platform that allowed users to share music files freely, offered unprecedented access to music, while fueling illegal downloads. This led to a downward spiral in CD sales, which had constituted the predominant revenue source for both artists and labels.

Post-peer-to-peer sharing models, the music industry explored and eventually found new digital avenues and streaming platforms. These new digital avenues provided customers with a legal, easier, cheaper, and more flexible method to access music. The incentive for piracy was greatly reduced relative to the cost of purchasing music as compared to the early 2000s. For example, the customer no longer needed to purchase an entire album to listen to an individual hit song. Instead, the new digital platforms charged a reasonable monthly subscription price in order to gain access to the platform's entire music library.

New technologies such as artificial intelligence (AI) could make it easier for people to copy existing music and generate their own original music. In the near term, we believe that AI is not likely to be a large disruptor for music royalty catalogue transactions. In order to produce AI-generated music, inputs are needed, and these inputs need to be paid for under copyright law. Also, music is driven by the image of the artist, and it is not believed at this time that an AI-created song only, without an image, would drive the same popularity. Recently, Universal has removed its catalogue from TikTok, citing that there are not enough controls in place to protect musicians from "the harmful effects" of AI, in addition to other drivers (see "Universal Music Group Pulls Songs From Tik Tok," New York Times, published Feb. 1, 2024). This shows how distributors work to protect copyright owners/licensees from new perceived threats.

As the way people consume music continues to change, there may be other challenges in protecting copyright owners and the collection of royalties. For example, in 2018, the Music Modernization Act was signed into law, which created a mechanism for digital service providers to license music to ensure that songwriters and publishers are paid royalties when their work is streamed or downloaded. This has reduced the severity of the piracy issue. We believe this example demonstrates that while there are complex and changing risks, the industry and artists, to some extent, have aligned interests and may work together to resolve issues to support the creation of new content.

A Look At Securitization And Credit Quality

For a music royalty securitization, the pool of assets generating royalties (income) consists of music catalogues of various sizes, which may include sound recordings and musical compositions of any number of assets from artists and songwriters. The asset pool will generally include agreements to publish, administer, license, sublicense, distribute, control, receive income from, perform, display, and reproduce the music. Recent deals have featured both single and multiple tranche structures, and the sizes of the deals have ranged from hundreds of millions to well over $1 billion.

S&P Global Ratings' rating approach

To analyze transactions where cash flows are generated from an originator's line of business with long histories and predictable flows, we typically apply our "Global Methodology and Assumptions for Nonfinancial Future Flow Transactions," published Jan. 16, 2020. However, for music royalty securitizations where the originator's main business is limited to the administration of music royalties rather than the generation of future assets, we may only borrow from this criteria to address the credit risk of the securitized portfolio of copyrighted music.

Credit quality: comparing the size of music royalty catalogues

Consumer music preferences and potential changes in music tastes over time creates shifts as it relates to specific songs and even genres of music. Music portfolios that contain a large number of songs and artists, as well as multiple genres, are more likely to generate stable and predictable cash flow than those that are more concentrated.

The age of a song also plays a major factor as royalty streams generally stabilize after a few years following the release of a song. While there are some outliers with songs seeing a second wave of success (e.g., Kate Bush's 1985 "Running Up that Hill" featured in the 2022 season of "Stranger Things"), there are very few instances of a sudden drop in royalties for a seasoned song/artist.

Chart 3

Operational/servicing risk

The exploitation of music royalty rights requires active management. The music distributor is typically responsible for negotiations between a digital service provider (an online store where music can be purchased or streamed) and music copyright portfolio owner. The distributor also typically promotes assets for synchronization (streaming and non-streaming), performance, and other consumption channels.

Depending on the royalty stream, there are various organizations responsible for the calculation, collection, and distribution of royalties. For example, performance royalties are collected by performing rights organizations such as SESAC, ASCAP, and BMI, while the Mechanical Licensing Collective generally collects and mechanical royalties. While calculations and collection of royalties can be quite complex, historical collection data is available as many of these systems have been in place for over 50 years. Notably, there have been few, if any, major disruptions. In addition, there are a number of music distributors in the publishing and recorded music industry that may be adequate replacements for an existing transaction.

Liquidity and payment risk

Transactions may include reserve accounts or other structural mitigants to address potential liquidity risks. Liquidity risk may arise from a delay in the collection of receivables from various obligors due to delinquency or defaults, or from foreign exchange risk. For example, due to operational risk, there may a mismatch in the time between the collection and distribution of the royalties to the copyright owner and the bond payment date, resulting in a shortfall. Therefore, as part of our analytics, we consider how that risk may affect the timeliness of interest and ultimate payment of principal.

Legal risk

In addition to reviewing standard structured finance asset isolation and special purpose entity legal considerations, we would generally seek to determine if the legal protections over intellectual property rights, are sufficient such that we could give credit to projected royalty cash flows as part our analysis.

In the U.S., Title 17 of the United States Code governs Copyrights. Section 106 addresses the rights of reproduction, adaptation and publication. Some of the exclusive rights outlined in this section are to:

• Reproduce and make copies of the original the work (e.g., download and CDs);
• Produce derivatives of the work (e.g., remixes and commercials);
• Distribute copies of copyrighted work to the public by sale or other transfer, rental, lease or loan;
• Publicly perform or play the copyrighted work (e.g., concerts, streaming, and radio);
• Perform publicly a digital audio transmission; and
• Display the copyright work publicly.

Data for our analysis

For potential inquiries, we would typically like to see the following types of data to assist in our analysis:

• Historical performance/track record of revenue generated by music catalogue.
• Detailed information regarding key characteristics of music catalogue, such as ages of songs, natures of royalties, artists, and genre(s).
• Who is the distributor and if there are multiple distributors, what percentages of revenue does each collect?
• Release dates of songs.
• Who are specific receivable payors under each revenue stream?
• Projected expiration of copyrights during the term of the transaction.

We Expect Additional Music Royalty Transactions In The Coming Years

The uptick in global music industry revenue over the last several years, and the desire of market players to diversify funding sources suggests that we may continue to see more of these types of transactions in the coming years. We encourage interested market participants to contact us with questions.

We also welcome any feedback on our nascent "ABS Frontiers" article series, which will explore what we see on the horizon with respect to new asset classes, transaction structures, and other developments across structured finance.

Related Criteria

• Global Methodology And Assumptions For Nonfinancial Future Flow Transactions, Jan. 16, 2020
• Global Framework For Assessing Operational Risk In Structured Finance Transactions, Oct. 9, 2014

Related Research

• ABS Frontiers: The Blurring Of Private Credit Funds And CLOs, Jan. 30, 2024
• Credit FAQ: ABS Frontiers: The C-PACE Space Explained, Dec. 13, 2023