DR. Prabuddha Ganguli [PhD]CEO“VISION-IPR”FLAT NO. 101/201, SUNVIEW HEIGHTSSHER – E- PUNJAB SOCIETY , ANDHERI EAST , Mumbai 4001093e-mail: ramugang@vsnl.com

Securitization of IP

Presentation at the WIPO-Italy International Symposium on IPR and Competitiveness of SMEs in Textile and Clothing

Caserta, Italy, November 30-December 1, 2005

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idea stage ..Technology development

Freezing of optionsPosition in the protectedTechnology grid

Idea Feasibility

Ideas demonstrable

Ideas ActionableIdea into product/process

Marketable Products/ProcessesAlignment with market

time

Rea

lisab

le V

alu

e of

IP

to

Pot

enti

al V

alu

e of

IP

Market acceptabilityCompetitive sustenance

IPRManagement

Product Lifecycle

Value addition to Organisation & Market

Hi to Low Risk

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IPR Enabled Knowledge Incubation and

Wealth Realisation

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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 $1B today. This recurring revenue stream is mostly unrestricted cash that represents 1/9 of IBM’s pretax profits and equates to $20B in product sales revenue.

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Value of IP

• Philips Electronics, enhanced licensing revenue by 45% and obtained 35% more patents in 2000 ascompared 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

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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.

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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

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Securitisations based on royalties

0

500

1000

1500

2000

2500

1992 1994 1996 2000

US $ million

Source: www.dechert.com article by Malcolm S Dorris

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IP Securitization by Industry

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 5Source: David Edwards in “From Ideas to Assets”, p. 605;

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SecuritizationSecuritization 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 from the assets' revenue stream.

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SecuritizationSecuritization means “a company, etc. transfers specified assets that it ownsto a vehicle that is newly established for the purpose of holding assets (called “special purpose vehicle; SPV”) and raising funds backed up bycash 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.

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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)

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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.

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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.

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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.

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Securitization of IP… JapanSecuritization 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.

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IP Securitization

Use of System Supporting Business with Effective Use of Intellectual Property Rights (SPC method)Source:Dev.Bank of Japan)

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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 rightsto a special purpose company (SPC).

The SPC raised funds from DBJ and others, and GONZO used the money it received from transferring the copyrightto produce a new work.

This new fund-raising method - distinct fromthe “production committee method,” which involves equity – enablesthe 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 businessrun by GDH K.K., GONZO's parent company and an investor in the project.

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Copyright securitizedShochiku 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 copyrightfrom Shochiku, raised funds from the Industrial Bank of Japan, by offering the royalties for the ground-based broadcasting right from TV Tokyo as backing.

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Patents SecuritizedScalar 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 thenSPC issued corporate bonds and raised funds backed up by the royalties for the patent rights.

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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: http://www.vinodkothari.com/index.htm

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Chrysalis deal structured by Bank of

Scotland{March 2001} 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.

Source: http://www.vinodkothari.com/index.htm

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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.

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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