Library assets: buying vs lending
A significant portion of MEP Capital’s investment activity involves us buying or lending against portfolios of film, TV, sports media, and other content rights.
The decision between buying or lending can sometimes come down to the type of library asset in question: (a) assets that realize value via ongoing, consumption-driven exploitation; or (b) libraries that generate proceeds from the periodic wholesale licensing of content to the ultimate distributors. The cash flows in the former category are more closely tied to observable sources of demand (e.g. downloads from Amazon) and are thus easier to forecast. In the latter category, revenues stem from lumpy payments made upon entering long-term licenses (e.g. licensing TV rights to a German broadcaster for 10 years) and are thus a step removed from actual consumption.
The analysis between buying and lending to the first category of library assets is relatively homogenous: a lender should simply be comfortable with owning the recurring cash flow stream at the price implied by the loan. In the case of wholesale libraries, the incentives between a buyer and a lender can vary widely depending on the structure of the deal. For instance, a buyer would be thrilled by the opportunity to license out all available rights as soon as possible. While this may lock-up future monetization opportunities for many years (5–20 typically), the near-term cash proceeds can de-risk the purchase or be reinvested in new endeavors.
A lender would only want this outcome if the near-term cash proceeds are applied to debt repayment. Even then, the motivations are skewed as lenders typically don’t enter financings in hopes of being repaid immediately. Yet the alternative could be riskier: if proceeds from licenses secured during the term of a financing don’t pay down principal, a lender is implicitly taking a bet on the owner’s prowess in reinvesting the proceeds until the debt comes due (and hopefully has protections to block the owner from taking cash out).
To illustrate using an oversimplified scenario of a library with $1,000 of cash flows over 10 years:
This creates a challenging backdrop for a negotiation. The owner of a library is ‘academically’ right to demonstrate the high present value implied by large near-term cash flows and thus demand higher advances, cheaper rates, etc from a lender. Meanwhile, the lender is correct that the high present value at time of closing may be meaningless by the time of maturity.
We believe this dynamic can make lending against wholesale libraries less competitive, creating opportunities to find a solution through structure or conviction in the underlying assets.
