Goldman Sachs (GS) has been working with SESAC, a privately held performing-rights organization, to try to issue a bond that would be backed by performance royalties from Bob Dylan, Neil Diamond, and a catalog of other classic performers.
Like a Rolling Annuity
How does something like this work? This royalties-backed bond would be what's called an asset-backed security, or ABS for short. As the name suggests, an ABS is a security that's backed by assets, in this case financial ones, like loans, credit card debt, and leases (basically anything but real estate). Securities backed by real estate have their own name -- mortgage-backed securities -- but it's all the same idea: An enterprise raises capital by attracting investor money, and promises to pay those investors interest over a defined period of time, plus their original money back as well.
In this case, the asset backing the ABS would be the pool of cash generated by performance royalties. Because an asset, even a financial one, is seen as more tangible than, say, a company's future prospects, asset-backed securities are often seen as a safer alternative for investors, who otherwise would only be able to invest in more risky things, like corporate debt.
It's not the first time asset-backed securities have been backed by assets that were unusual or exotic: Previous assets have included timber harvests, time-share revenue, and cell phone-tower leases. But it's fair to say that none of those quite have the novelty factor of a bond backed by the performance royalties of Dylan and company.
Junk by Any Other Name
According to the Financial Times, the $300 million bond was initially supposed to be sold last month, but has been delayed until later this month. Goldman didn't comment on why, but it's clear the Wall Street titan wanted to restructure it. It's possible Goldman was having a difficult time finding investors.
So Goldman is going back to the drawing board to restructure the bond into two separate tranches: one that will have a higher credit rating, and therefore pay a lower yield, and one that will have a lower rating, and therefore pay a higher yield.
Blowin' in the Bond Markets
Higher yields -- ah, there's the reason Goldman Sachs and other banks are trying out the prospects of such unusual bond offerings as this. In a world in which U.S. Treasuries are paying 2% or less, investors are hungry for decent returns. As such, investor interest even in boring old corporate junk has seen a serious resurgence of late. So why not give bonds backed by timber harvests, time-share revenue, or even the music of Bob Dylan a go?
How many roads must a man walk down before he can find a decent rate of return? If Goldman Sachs -- and maybe some of the other big Wall Street banks keeping their eye on this unusual bond offering -- has its way, the answer, my friend, may just be blowing in the bond markets.
John Grgurich is a regular contributor to The Motley Fool. Motley Fool newsletter services have recommended buying shares of Goldman Sachs.