Remember Hipgnosis? Everyone’s favourite topsy-turvy upside-down elephant is back, and this time - for a change - the news is good: a Blackstone-backed music rights megabond issue, “one of the largest-ever music royalty securitisations”.
That “securitisation”, known as Lyra 24-2, bundles up a bunch of future royalty income from thousands of songs intro tradeable securities - effectively bonds - selling them to institutional investors who fancy a steady income stream, backed by the gush of royalties generated by the hefty Hipgnosis song catalogues.
What’s notable is that the value of the deal - $1.47 billion - is just shy of the $1.6 billion that Blackstone paid to acquire the publicly-listed Hipgnosis Songs Fund, or SONG, meaning the private equity giant has recovered all but $130 million of the amount it ponied up for the company just a few months back. Even taking into account paying off the $700 million of debt that Hipgnosis had at the point Blackstone acquired it, those numbers still look pretty decent.
If the royalties coming in to Hipgnosis are more than the interest it needs to pay out on the bonds (spoiler alert: that’s the plan) then it pockets the difference, with fairly minimal amounts of money tied up in the deal. Nice work if you can get it.
In a statement issued by Hipgnosis, Ben Katovsky and Dan Pounder - respectively CEO and CFO of Hipgnosis - say, Tweedledee and Tweedledum style, that the deal is “a significant milestone” for the company which “not only reinforces the quality and strength of our music catalogue but also enables us to unlock new opportunities for growth and investment”.
Those “new opportunities for growth and investment” presumably involve gobbling up more catalogues, to be able to further expand Hipgnosis’s share of the “fast-growing investable asset class” that is music rights.
Hipgnosis is, say Katovsky and Pounder, a “leader” in this area, and will be able to leverage its “proprietary technology and data analytics platform” to deliver “innovative financial solutions” and “expand the investor base” to deliver “further institutionalisation of the asset class”. And all that just from a simple song.
The successful completion of the bond sale marks a dramatic turnaround for Hipgnosis. When Merck Mercuriadis founded the company in 2018, it helped kick off a feeding frenzy for music rights from high-profile artists.
However, by late 2023, the company was struggling with a raft of problems, including accounting errors that cut the book value of its portfolio and led to the discovery of "double counting" and "overstatement" of revenues. That, in turn, led to a public slanging match between two different parts of the Hipgnosis empire, which escalated to high-opera levels of drama during a takeover battle for SONG that saw Blackstone and Concord trading bids like playground insults.
Blackstone ultimately triumphed and this latest bit of financial engineering represents a washing clean of the slightly smudged Hipgnosis slate. To protect the investors (because, maybe just perhaps, some people are a little nervous about Hipgnosis’s previous creative accounting adventures) there are some pretty strict rules about documentation and ownership rights.
According to documents obtained by CMU, KBRA - the credit reference agency for this sort of financial product - did a fairly deep dive to assess the securitisation issue, after which it issued an A- rating, which translates as “solid, you’ll probably not lose money”.
In particular, KBRA looked at things like whether Hipgnosis actually owns the rights in the songs that they’re wrapping up in the bond issue (possibly a valid concern, given past events), whether the royalty payments are reliable (more than 70% of the songs are over ten years old, so they have a solid track record), whether there’s proper documentation for everything (to avoid any more double counting disasters) and what sort of protections there are for investors (like making Hipgnosis buy back any problematic songs).
And, of course, having one of the largest hedge funds in history - Blackstone, which has more than $1 trillion of assets under management - put its name to the deal presumably helped secure that rating.
The A- rating is particularly crucial because it means that these bonds qualify as “investment grade”, something that a pension fund, insurer or other serious financial types might want a piece of. In fact, many large institutional investors are only allowed to buy investment grade securities.
What’s also noteworthy about the deal is that it is structured as a “master trust” - think of it as a musical Russian doll - which means that Hipgnosis can keep adding more song catalogues and issuing more bonds in the future.
The deal has attracted 25 institutional investors, a fairly ringing endorsement not only for this particular deal, but also the wider securitisation of music rights as an asset class - something which definitely took a bit of knock over the past year or so.
Music rights royalty bonds had - until this deal - reached about $1.1 billion so far in 2024, and with Hipgnosis seemingly set to go shopping with the money unlocked by this issue, 2025 could see the music rights market place heat up again considerably. And, of course, it goes a long way to prove Mercuriadis’s original thesis, which was that music rights offer long term value to investors.