Celebrity bonds are commercial debt securities issued by a holder of fame-based intellectual property rights to receive money upfront from investors on behalf of the bond issuer and their celebrity clients in exchange for assigning investors the right to collect future royalty monies to the works covered by the intellectual property rights listed in the bond. While a celebrity bond can cover any work of art whose future royalties are based in part on a widespread reputation of the creator of the work, celebrity bonds often are music-based celebrity bonds. For a music-based celebrity bond, a music celebrity bond issuer seeks to put together intellectual property rights of one or various artists to “songs that have stood the test of time,” typically “top-40 greatest hits across genres from jazz to rap to rhythm and blues.” In addition to getting money upfront, artists additionally retain ownership of their work and do not have to pay tax on what the IRS considers a loan, since yet-to-be received royalties are re-characterized by the bond agreement as loan interest and principal payments. The artists also passes on the risk to investors that the works backing up the celebrity bond will lose their appeal, where the investors are in a better position than the artist to assess such a risk.
Bowie Bonds are asset-backed securities of current and future revenues of the 25 albums (287 songs) that David Bowie recorded before 1990. Bowie Bonds were pioneered in 1997 by rock and roll investment banker David Pullman. Issued in 1997, the bonds were bought for US$55 million by the Prudential Insurance Company of America. The bonds paid an interest rate of 7.9% and had an average life of ten years, a higher rate of return than a 10-year Treasury note (at the time, 6.37%). Royalties from the 25 albums generated the cash flow that secured the bonds’ interest payments. Prudential also received guarantees from Bowie’s label, EMI Records, which had recently signed a $30m deal with Bowie.By forfeiting ten years worth of royalties, Bowie was able to receive a payment of US$55 million up front. Bowie used this income to buy songs owned by his former manager. Bowie’s combined catalog of albums covered by this agreement sold more than 1 million copies annually at the time of the agreement. However, by March 2004, Moody’s Investors Service lowered the bonds from an A3 rating (the seventh highest rating) to Baa3, one notch above junk status. The downgrade was prompted by lower-than-expected revenue “due to weakness in sales for recorded music” and that an unnamed company guaranteed the issue.
The Bowie bonds liquidated in 2007 as originally planned, without default, and the rights to the income from the songs reverted to Bowie