The Real Price Of Fame

By Daniel Kadlec

Rock star David Bowie performed for a sellout crowd last year on Wall Street, and now dozens of impressed entertainers want to play that venue. Don't look for them in any concert hall, though. The show consists of a financial maneuver that, if bankers get their way, will explode in popularity in the next year or two. It could spawn a new type of mutual fund that fans might find hard to resist.

What is this fancy money move? By pledging future royalties on things like record sales and publishing fees, celebrities can get their money up front. They literally issue bonds to investors, who collect the royalties as their interest and principal payments over, typically, 10 to 20 years.

Bowie grabbed $55 million that way in the first bond deal of its kind. Since those "Bowie bonds," there has been much hype about entertainers eager to cash in their estate before it actually exists, but few deals have been cut. That's about to change. David Pullman, the banker behind the Bowie deal, closed three more celebrity-bond deals in July. Altogether he raised $30 million for the Motown writing trio of Edward and Brian Holland and Lamont Dozier, whose hits include Stop! in the Name of Love and Baby I Need Your Loving. To date, Pullman's deals are the only ones of their kind, though Nomura Capital Entertainment recently arranged a $15 million loan for Rod Stewart that was secured by the star's future royalties. SPP Hambro is close to cutting a similar deal for slugger Frank Thomas, who has a long-term contract with the Chicago White Sox. Six months ago, former record executive Charles Koppelman formed CAK Universal Credit in partnership with Prudential Securities, and he says he'll close $100 million in entertainer loans--his first deal--by the end of August and that Prudential will bundle them into a bond issue some months later. Snipes Pullman: "Everyone is trying to copycat us."

Pullman, 36, has been working this area since the early '90s, first for investment firm Gruntal and then in partnership with Fahnestock & Co. Last month he shook off those names and set up the Pullman Group to chase celebrity bonds in a big way and, he hopes, brand himself as the top name in this esoteric field. He and others say the bonds will ultimately extend to all sorts of intellectual property that generates a steady stream of income: patents, authors' royalties and writers' residuals from TV reruns and film libraries.

Indeed, Pullman is working on deals with Crosby, Stills and Nash; the heirs of author John Steinbeck; and writers for the Seinfeld TV show. He's also working on a deal with songwriters for Tupac Shakur, Kim Carnes, Heart, Patti Smith, Joan Jett, Rod Stewart and Pat Benatar. Their royalties and those of other songwriters will be bundled and sold as bonds by year-end, Pullman says. He predicts half a dozen similar deals next year.

Celebrity bonds are a natural extension of the $200 billion asset-backed securities market. It began with home mortgages in the '80s, when lenders began bundling thousands of mortgages into a single unit that then issued bonds and used the steady stream of mortgage payments to pay interest. Wall Street now "securitizes" everything from credit-card receivables to anticipated beer sales at Britain's Punch Taverns.

Celebrities who issue bonds are essentially borrowing money and paying it back through future royalties. So the loan--the up-front money--is free of income tax and in fact can generate a tax deduction: forfeiting royalties is partly an interest expense, deductible if the loan is used for investment. Once the bonds mature, the celebs retain ownership of the property that generated the royalties. If the royalties are greater than expected, the bonds get retired early. So the celebrities get all the upside.

The investor bears the risk if royalties come in lower than expected, as well as the considerable risk of a bond that does not trade actively and should be held until maturity. But for that the investor gets an interest rate 1 to 2 percentage points higher than comparable (single-A) corporate bonds. The rate on the deals so far has been 7% to 8%. For now, such bonds are suitable only for insurance and pension-fund managers. But, says Pullman, "we're working out the kinks." Their star power could make for a popular bond mutual fund. Now that's entertainment.