Kobalt Music Group ABS offering security

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Kobalt Music Services America II is prepping its first asset-backed security (ABS) deal. It will sell $266.5 million to investors, secured by the publishing royalties of a 5,000-song strong music catalog from artists including Busta Rhymes and Jessie J.

Kobalt Music Group will issue one class A tranche, an A-2 piece rated A- from Kroll Bond Rating Agency, with an expected final maturity in April 2024. Musical publishing rights support all of the royalties with an estimated third-party valuation finding the catalog to be worth $410 million as of September 30, 2023. The valuation included an assumption of an 8.25% discount rate for songs at least 18 months old at and 11.75% for songs between three and 18 months old at valuation.

Kroll Bond Rating Agency says Kobalt Music Services America is the largest independent global administrator, with its ABS backed by a large pool of royalties from a diverse group of artists.

The catalog consists primarily of pop (52%), hip-hop (28%), and rock (9%) genres. The top three catalogs compose 33.3%, and the largest artist represents 16.6% of the pool. Underlying revenues are derived mostly from the United States, which accounts for 63% of gross collections. The European Union (12%) and the United Kingdom (10%) follow.

Streaming represents the majority of royalty cashflows from these catalogs, which KBRA credits as a potential positive due to industry growth. Kobalt’s notes are overcollaterized by 35% with a debt service reserve account sized to cover six months of fees and interest on the notes. The Bank of New York Mellon is on the transaction as trustee and calculation agent, while FTI Consulting is on the transaction as back-up manager.

Kobalt’s asset-backed security offering is just the latest in a handful of securitization deals made across the music industry. Concord, Hipgnosis Song Management, Northleaf Capital Partners, and KKR Credit Advisors are just some of the companies to raise money through ABS sales.