Brand Securitization in Sri Lanka
With tangible assets accounting for only about 30 percent of a
company's value and the remaining 70 percent in intangible assets,
securitization of intangible assets is becoming an alternate/preferred
option to raise funds.
MTI Consulting and Intangible Business recently analyzed how the
changing economic dynamics and recent financial crisis have challenged
companies financially, resulting in development of new ways for
companies with Intangible assets to recapitalize themselves.
The idea of intellectual capital emerged during late 90s, until then
it was only one class of asset that were leveraged i.e., the tangible
assets of receivables, plant, property and equipment. It was during the
end of 20th century companies started to realize the importance of
intangible assets and ever since the intangible proportion of company
value (market capitalization) has increased.
Securitization of intangible assets ensures continuing ownership and
control over all intangible assets. In this strategic model, an
enterprise can ride the rise of intangible asset values and use its
natural core competencies to finance its own mission to a greater
degree.
This provides an opportunity for banks and other financial
institutions to offer new, more competitive, debt finance by taking
advantage of the intangible assets suitable for supporting debt.
It also highlights the need to address other loss making parts of the
businesses. Current accounting standards do not automatically mean that
this is apparent, and so the challenge for the accounting profession is
to identify such situations and act on them.
There are two main benefits of securitizing intangible assets.
Firstly, it provides access to a greater source of capital to fund
investment. Secondly, by securitizing the loan the risk is reduced
leading to lower interest rates and therefore cost savings. Isolating
the intangible assets also has its own benefits. This delivers a greater
appreciation and management of the intangible assets as their values
will be continuously monitored internally as well as externally.
Globally there have been few companies in the past which were
successful in using their intangible assets for raising debt. The most
famous example being Walt Disney, which raised about USD 725 million in
the Japanese market in 1988 through issuance of bonds against future
earnings of the park for the next 20 years. The deal was structured in
such a way that the investors had to bare any shortfall in the revenues
and Disney continued to get its royalties without losing any money.
It was the Walt Disney brand in which investors showed faith and
responded positively in the markets. Tokyo Disneyland is owned by a
Japanese company Oriental Land Company (OLC).
OLC pays royalties to Disney for using its brand. In 2004, BCBG Max
Azria group, a US-based fashion retailer raised about USD 53 million by
securitizing its brand which involved bond issues backed by brand name.
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