Why Banks Could Start Lending More Money for Music Catalogs

If you’re borrowing money against a catalog of music in the coming years, you may be able to get more cash. That’s according to music valuation firm Red Brick Advisors, which wrote in a newsletter this week that music finance insiders expect to see an increase in something called the loan-to-value ratio (LTV).  

LTV is the amount a borrower can get from a lender when using a music catalog as collateral. A decade ago, Red Brick noted, bank lenders’ upper bound on the LTV for music catalogs was 50% — meaning a lender will give a borrower up to 55% of the value of the catalog. The market was different back then: There were about five lenders that regularly financed music intellectual property, and lenders accepted as collateral seasoned music publishing catalogs. These days, a 55% LTV is typically the upper bound.   

That could change. According to Red Brick, music finance insiders believe that the upper bound of bank lenders’ LTV has room to expand to 60% in the coming years — at least for an institutional borrower with a diversified catalog, not every type of catalog or asset. 

Shifts in the lending marketplace are changing the LTV. Today, Red Brick believes there are upwards of 20 providers of bank financing willing to regularly finance music IP — four times the number of lenders roughly 15 years ago. Some names, such as City National Bank, Truist (formerly SunTrust) and JP Morgan, are well established in the space. So are well-known global brands like Barclays, Goldman Sachs, Bank of America and RBC. There are regional banks, too: Fifth Third, First Horizon, Pinnacle, Regions Bank, California Bank & Trust and Texas Capital Bank. A few other names on the list are less familiar: Citizens Bank, Mitsubishi UFJ Financial Group and Flagstar.  

Growth and stability in music revenues in the last decade have created more interest in the financial world. Music has turned out to be a reliable asset class that churns out royalties — even through economic downturns. Not only are there more lenders, but they’re willing to take more types of collateral. Today, deals involve frontline catalogs, passive revenue streams such as producer royalties, single artists and operating companies.  

Two factors underpin the possible increase of bank lending LTV to 60%. First, the influx of new lenders eager to capture market share results in easing their lending standards. If established banks won’t go beyond 55%, a new entrant could gain attention by adopting a 60% LTV.  

In addition, bank lenders are losing business to the asset-backed securities market, which has allowed music companies to raise many billions of dollars in recent years. ABS deals have an LTV up to 65%. Kobalt’s 2024-1 ABS, for example, had a 65% LTV, as did Hipgnosis Music Assets, Hi-Fi Music IP Issuer and Crescendo, according to KBRA. Banks would still have a lower LTV than ABS deals, but an ABS is more complicated and costly.  

ABS deals rose in popularity as interest rates increased and catalog owners sought financing to fuel more acquisitions. This year, ABS deals accounted for three of the biggest music transactions: Concord did a $1.75 billion ABS, HarbourView Equity Partners did its second $500 million ABS and Recognition Group (formerly Hipgnosis Songs Management) raised $327 million through an ABS.  

There’s more to the story than the size of the loan. A rising LTV means higher catalog valuations, too. According to Red Brick, every 1% increase in LTV will result in a reduction in the discount rate of approximately 0.14 basis points and a valuation increase of 1.3%. If the LTV rises to 60% from 55%, valuations will increase by 6.9%.  

“In a valuation, the discount rate incorporates the expected LTV for that particular catalog and the cost of debt,” Red Brick’s Sachin Saggar tells Billboard. “The LTV is based on what the valuer thinks the market will bear considering the specific risks for that catalog. So, for a specific catalog, an increase in LTV means the discount rate will fall, as the cost of debt is always lower than the cost of equity.”  

A higher LTV could cause problems in the future. Although the music sector has not encountered any “notable” loan issues, Red Brick warns that “no asset class is immune to challenges.” Any issues wouldn’t be a drag on music catalogs, though, and the sector would “reassess processes and determine appropriate financing levels for different types of music rights,” they wrote. “In our view, this is a natural part of the maturation process for any emerging asset class.”