TMFW 34 - Ground Control to Major [Rating Agencies]

 

 

With the NFL draft on the horizon, many football pundits are weighing in on teams' various "needs" and on the "best" and "worst" contracts teams have been signing so far this offseason.  Among the discussion of the business of football has been some press for Fantex, Inc.   Fantex bills itself as a stock brokerage - it is registered with the SEC as an "alternative trading system" - and it deals exclusively in "tracking stock" for professional athlete contracts. 

 

Essentially, Fantex pays an athlete a fixed amount of money, upfront, for a percentage of the athlete's future income.  In the case of San Francisco 49ers Tight End Vernon Davis - whose "stock" started trading publicly on Monday - Fantex paid $4 million for 10% of all future income, whether it is from a playing contract, endorsement, television gig, motivational speaking, etc.  Then, Fantex sold 421,000 shares of "VNDSL" priced at $10 each.  That paid for the $4M to Davis, and netted Fantex $210K for its efforts.  Going forward, Fantex promises to allocate 95% of its 10% share to the VNDSL shareholders, net of its expenses.  So if Davis signs a big deal or becomes the next Payton Manning of endorsements (i.e. the guy who is on every other commercial during the NFL season), then shareholders might see a return on their investment.  But it's a long shot at best - Davis is 30 years old, he will make only $14M in his next three years before free agency, and his best current endorsements are for a "gourmet jerky" and something called "NutraClick." 

 

Still, the idea of owning a share of a pro athlete is pretty fun.  Fantex plans an IPO for Bills quarterback EJ Manuel, and (until a season-ending injury last year) had planned an IPO for Texans running back Arian Foster too.  Whether more athletes get involved remains to be seen, but the Fantex "bundle up and sell future celebrity earnings" concept is interesting.

 

Interesting, but not unique.  In the music industry (see? I told you there was a music fact in here), a similar offering was first made over 15 years ago by David Bowie.  In 1997, Bowie needed money to invest in his internet business (called "BowieNet," for real) and to buy full ownership of his songs from a former manager, who owned 50% of much of Bowie's catalog.  So Bowie worked with investment banker David Pullman, who packaged together and securitized future royalties and license payments for 287 of Bowie's songs.  The so-called "Bowie Bonds" were initially rated AAA (investment grade) by Moody's.  They paid a rich interest rate of nearly 8% over an average term of 10 years, and were offered at $55 million.  According to a contemporary Washington Post story, there was intense interest in the bonds.  But unlike Fantex, Bowie's bond issue wasn't available to the general public; instead, all $55 million was bought by Prudential Insurance Company. 

 

So the next time you hear about the "new trend" of celebrity financial instruments, you will know that Ziggy Stardust helped blaze that trail. 

 

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BONUS FACT 1: It's not clear whether the Bowie Bonds were ultimately a good investment by Prudential (there is much on the issuance of the bonds but not much on how they fared), but after the advent of Napster in 1999 and the start of a significant decline in music sales - they were cut in half between 1999 and 2009 - Moody's downgraded the bonds three grades in 2004 to one notch above junk status.  

 

BONUS FACT 2: Following the success of the Bowie Bonds issuance, Pullman did a number of other "celebrity bond" deals, including James Brown, Ashford & Simpson, and the Motown songwriting team of Holland-Dozier-Holland.  Given the current state of the music industry (the ch-ch-ch-ch-changes since Bowie's '97 deal), the relative lack of artists that hold full rights to a catalog of hits, and the securitization of everything under the sun, the future is not bright for celebrity bond issues in the music industry.

 

BONUS FACT 3:  Shortly after Tim Tebow's first and only playoff win with the Broncos, TMFW favorite Jimmy Fallon - performing as "Tebowie" - did a terrific parody of "Space Odyssey".  It's worth the watch.