Businessweek reports here that Sears has quietly created $1.8 billion in securities based on its brands Kenmore, Craftsman, and DieHard.
Sears is on the cutting edge of a financial innovation so important that it could unlock trillions of dollars in capital across Corporate America and change the way managers of a wide range of businesses think about their balance sheets.
Sears has created $1.8 billion worth of securities based on the brand names Kenmore, Craftsman, and DieHard. In essence, it has transferred ownership of the brands to another entity, which it then pays for the right to use the brands. The deal, carried off last May, was the biggest “securitization” of intellectual property in history, according to Eric Hedman, an analyst at Standard & Poor’s (MHP ), which, like BusinessWeek, is a unit of The McGraw-Hill Companies. (MHP ) The story hasn’t gotten out until now because the bonds haven’t actually changed hands—Sears is holding them in its Bermuda-based insurance subsidiary—and because Sears has never disclosed them, nor has it had to do so. But that could change if Sears were to decide to sell them to outside investors and collect the cash.
Now, Sears could be on the cusp of turning a much squishier asset, intellectual property, into actual cash. Don Davis, managing director and general counsel at Commercial Strategy, a Boston intellectual property consulting firm, says the potential for a market in bonds backed by intangible assets could be even bigger than the market for junk bonds, given that 70% to 80% of the total value of the stock market rests on intangibles such as intellectual property. “The scale is astounding,” he says.
Sears, through a spokesman, says the bonds’ only purpose is to provide liquidity in the coffers of its insurance subsidiary to offset any potential losses there. It also says Lampert had nothing to do with the transaction but was briefed on it. And it says Sears’ outstanding debt is small relative to the company’s total value and is less than the cash it has on hand.
Sears has, in essence, created licensing income from whole cloth. First it transferred ownership of the brand names into KCD. Now, KCD charges Sears royalty fees to license those brands and uses the royalties to pay the interest on the bonds. It has sold the bonds to the insurance subsidiary, where, like any other security on an insurer’s books, it serves as protection against future loss. The insurer, meanwhile, protects Sears from financial trouble—and because it’s a subsidiary, it does so at a lower cost than Sears could get from an outside party.
Intellectual property bonds got their start with an unlikely financier: David Bowie. The rock star floated $55 million worth in 1997, backed by 300 song titles, with the interest covered by royalty payments from the songs. Since then, some 30 other deals have been struck. Film studios have issued bonds backed by future revenue streams. Designers such as Bill Blass (NEXC ) and retailers such BCBG Max Azria Group Inc. have issued bonds backed by outside licensing fees. And restaurant chains such as Arby’s Restaurant Group (TRY ) have issued bonds against outside franchising fees.
Sears’ KCD deal is different in one important way: It didn’t involve preexisting royalty payments. The company created the payments in order to issue the bonds. Richard D. Rudder, a New York lawyer who specializes in securitization of intellectual property and consulted on the KCD deal, says it’s the first deal he has seen that hasn’t involved cash coming in from the outside. In filings, Sears has suggested it could potentially license the trademarks to other parties—for example, to another company to make a new line of Craftsman products—although it hasn’t done so yet.
