Securitization of IP DR Prabuddha Ganguli Ph D

Securitization of IP DR. Prabuddha Ganguli [Ph. D] CEO “VISION-IPR” FLAT NO. 101/201, SUNVIEW HEIGHTS SHER – E- PUNJAB SOCIETY , ANDHERI EAST , Mumbai 4001093 e-mail: ramugang@vsnl. com Presentation at the WIPO-Italy International Symposium on IPR and Competitiveness of SMEs in Textile and Clothing Caserta, Italy, November 30 -December 1, 2005

IPR Enabled Knowledge Incubation and Realisable Value of IP to Potential Value of IP Wealth Realisation Hi to L ow Risk Product Lifecycle Competitive sustenance Market acceptability IPR Management Marketable Products/Processes Alignment with market Idea into product/process Ideas Actionable Ideas demonstrable Idea Feasibility Freezing of options Position in the protected Value addition Technology grid to Organisation idea stage. . Technology & Market development p. ganguli© 2003 pganguli© 2005 time

Value of IP • Dow Chemical Company lowered maintenance taxes paid by aligning its intellectual assets with business strategies reduced its annual costs for obtaining and maintaining patents by $1. 5 million. By reducing its patent portfolio from 12000 patents to 8500 patents from 1993 to 1999, Dow saved $ 40 million in maintenance tax savings. • IBM increased patent licensing royalty revenues 3, 300% from $30 million in 1990 to $1 B today. This recurring revenue stream is mostly unrestricted cash that represents 1/9 of IBM’s pretax profits and equates to $20 B in product sales reve pganguli© 2005

Value of IP • Philips Electronics, enhanced licensing revenue by 45% and obtained 35% more patents in 2000 as compared to their performance in 1999. • British Telecommunications generated ~ $14 million in new licensing revenue by data mining its patent portfolio and unlocking new sources of revenue pganguli© 2005

Traditional financing methods • Royalty recipients turn future receivables into cash by selling the intellectual property outright. -- the owner receives a lump sum but loses all control over the assets. • Method of cashing in on royalty payments has been to borrow against them. This type of loan provides a fairly low amount of proceeds -- about 70% of the value of the receivables. -- the term of these loan is < five years, resulting in fairly high installment payments. pganguli© 2005

Loans using intellectual property rights as collateral Venture companies lacking sufficient physical collateral, such as land, buildings and other real estate, and credit strength find it difficult to obtain loans from financial institutions. In these cases, Banks use loans secured by IPR, such as patents and copyrights with market value. Examples of intellectual property rights serving as collateral • Patents that have been approved, patents that have been filed (in principle, patents cannot be used as collateral before they have been filed for approval) ; Program copyrights (computer programs), copyrights applying to content ; Other IPRs pganguli© 2005

Securitisations based on royalties Source: www. dechert. com article by Malcolm S Dorris pganguli©

IP Securitization by Industry Issuance $MM % of total issuance Number of transactions % number of transactions Film 865 42 2 10 Music 446 22 14 70 Sport 315 15 1 5 Fast Food 290 14 1 5 Pharma 100 5 1 5 Apparel 24 1 1 5 Source: David Edwards in “From Ideas to Assets”, p. 605; pganguli© 2005

Securitization is the pooling of revenue - generating assets, and issuing securities backed by them. The owner of the assets receives payment based on the discounted present value of the transferred assets, and the investors obtain a return on their investment derived pganguli© 2005 from the assets' revenue stream.

Securitization means “a company, etc. transfers specified assets that it owns to a vehicle that is newly established for the purpose of holding assets (called “special purpose vehicle; SPV”) and raising funds backed up by cash flows arising from transferred assets through the SPV. It is financial means of raising funds by taking only specific assets as reserves instead of the entire asset base of the fund-raiser. pganguli© 2005

IP Securitization Known Securitization Approaches • issuance of publicly-offered corporate bonds (typical securitization); • issuance of privately-offered corporate bonds; • privately-offered bonds that are practically IP - backed loans (e. g. , privately-offered bonds underwritten by a single institutional investor); and non - recourse loans collateralized by IP (IPR) pganguli© 2005

IP Securitization Known Securitization Approaches • a scheme of securitizing rights in small portions could also be added since this scheme does not sufficiently secure bankruptcy remoteness of the assets at all and the investors would directly bear any risk concerning the assets, it would be better to distinguish this scheme from securitization. pganguli© 2005

IPR Securitization • the characteristics of the assets to be securitized • the transfer of assets to be securitized i. e. transferability; true sales; effectiveness against third parties; risk of cancellation of a license contract ; evaluation of the IP concerned. • credit enhancement • issue of securities • handling after the implementation of the securitization. pganguli© 2005

Securitization in USA Asset-backed securities issued : 2. 9 trillion $ Compare with straight corporate bonds issued 880 billion $ Diversification of Assets for securitization include Lease credit claims and mortgages, intellectual property (IP) In January 1997, David Bowie, a U. K. rock star, issued Bonds backed by the royalty claims for his music works, and raised 55 million dollars in the U. S. financial markets. This case is recognized as the first IP securitization. pganguli© 2005

Securitization of IP… Japan Securitization of the ground-based broadcasting right (a type of copyright) in 2002, and The first attempt of securitization of a patent right was made in 2003. pganguli© 2005

IP Securitization Use of System Supporting Business with Effective Use of Intellectual Property Rights

DBJ cooperated with the Bank of Tokyo-Mitsubishi, Ltd. , in providing loans to GONZO K. K. to produce a new animated film. In this project, GONZO transferred the intellectual property rights to a special purpose company (SPC). The SPC raised funds from DBJ and others, and GONZO used the money it received from transferring the copyright to produce a new work. This new fund-raising method - distinct from the “production committee method, ” which involves equity – enables the consolidated management and use of the copyright by the SPC as well as the introduction of non-recourse loans and outside investors, paving the way for the development of content businesses that can compete on a global stage. The key factors behind the success of this project were GONZO's digital technology for animated productions and the motivation to find a new form for the licensing business run by GDH K. K. , GONZO's parent company and an investor in the project. pganguli© 2005

Copyright securitized Shochiku Co. , Ltd. , a film company, granted TV Tokyo Corp. the ground-based broadcasting right for 34 films that had yet to be aired from among a total of 48 of the popular serial films “It’s Tough Being a Man. ” The SPC, having obtained this content copyright from Shochiku, raised funds from the Industrial Bank of Japan, by offering the royalties for the ground-based broadcasting right from TV Tokyo as backing. pganguli© 2005

Patents Securitized Scalar Co. , a venture company holding multiple patents relating to optical technology and engaged in the development of optical lenses, had granted an exclusive license for four patent rights that it owned to Pin Change, Co. , Ltd. , a venture company within Matsushita Electric Group. Scalar transferred these patent rights to the SPC and then SPC issued corporate bonds and raised funds backed up by the royalties for the patent rights. pganguli© 2005

Examples… Securitization Music industry : David Bowie's securitisation, others based on receivables from music tapes. Iron Lady's music receivables have been securitised. Others: Scorpion, Ron Isley, etc Fashion designers: In 1993, US fashion company Calvin Klein raised US$58 million with the securitization of royalties on perfume brands, arising from the exclusive right to use the Calvin Klein trade mark on existing and future products. Source: pganguli© 2005 http: //www. vinodkothari. com/index. htm

Chrysalis deal structured by Bank of Scotland{March 2001} Source: http: //www. vinodkothari. com/index. htm GBP 60 million deal The transaction uses a loan structure and not a true sale structure. The 15 -year transaction includes a three-year revolving period followed by a 12 -year amortisation period to a substantial residual amount Funded by MUSIC Finance Corp and the collateral was the Chyrsalis Group’s International music catalogue and the revenues derived from the Catalogue – the Net Publishers Share (NPS) - via the US Commercial Paper market. pganguli© 2005

Chrysalis deal structured by Bank of Scotland GBP 60 million ~ 40% of the estimated current value of the catalogue and is non-recourse to the rest of the Chrysalis Group. Chrysalis is allowed to maintain control over the administration and management of its various music-publishing subsidiaries. Effective interest rate after amortising all fees and costs compared well to the Group’s then-prevailing cost of borrowing. pganguli© 2005

Securitization… newer approaches • Monaco Records – cash flows from Intellectual Property rights owned or administered by the record label will go to repay investors who can exercise their right to 'buy into' profits when they reach a pre-determined level – investors can realise their profit and a higher interest rate in a much shorter time frame than with a traditional Asset-Backed Bond issue, which will normally take between 10 to 15 years to mature. – the product will be offered to retail investors in the capital market while earlier IP securitisation products have been lapped up mostly by insurance companies on private placement pganguli© 2005