CAK CREDIT COUNTS CREATIVITY, TOO
Byline: Thomas Cunningham
NEW YORK — Fashion executives often complain that bankers do not really understand their business. Primarily concerned with cash flow, assets and the almighty bottom line, bankers do not give enough consideration to harder to quantify values like the creative power of a designer or the value of a brand, they say.
But Charles A. Koppelman and Robert D’Loren have set out to change that perception. The two hard-nosed businessmen — Koppelman ran the North American operations of EMI Records for four years and D’Loren co-founded an investment banking firm — say intellectual properties like designer brands are worth more than lenders realize.
Two years ago, the two men formed an investment bank, CAK Universal Credit Corp., to put their ideas to the test. Using a type of financing known as asset-backed securitization, CAK sought to raise money for companies and individuals in the film, music and fashion industries. The key selling point of the technique, which they call “whole company securitization,” is that it enables borrowers to receive an “investment grade” rating and a lower interest rate.
Before founding CAK, where he is chairman and chief executive, Koppelman had an almost 30-year run in the entertainment industry that began when he joined a vocal trio called the Ivy Three in 1960 and culminated in the EMI post, which he left in 1997. Along the way, Koppelman helped shepherd the careers of stars like Frank Sinatra, Billy Joel, Tracy Chapman, and Garth Brooks.
D’Loren, CAK’s president and chief operating officer, was managing director at D’Loren, Levien & Co., an investment bank and commercial mortgage brokerage firm that he co-founded. With 17 years of experience in finance-related enterprises, D’Loren also was a manager with the accounting firm Deloitte & Touche.
After keeping a low profile as it built its business, CAK burst onto the fashion scene last November when it used its asset-backed financing to arrange the sale of Bill Blass’s business to Blass’s biggest licensee, Haresh Tharani, and Michael Groveman, Blass’s chief financial officer. The deal, believed to be the fashion industry’s first investment-grade asset-backed issue, helped the buyers finance their deal by creating securities around the Blass trademarks, brand equity and licensing revenues.
And the Blass deal is just the start, according to D’Loren.
“We are talking to most of the major fashion houses, and if there is a need for capital, they’re going to do our deal,” said D’Loren. “When you look at companies like Tommy [Hilfiger], [Donna] Karan and [Polo] Ralph [Lauren], they’re consistently bashed by the Street and the press and by people that really don’t understand their businesses and can’t accept that this is a highly cyclical business. There will be more companies looking at this as an alternative to going public.
“In fact, a lot of those companies that are already public we could take private, and instead of dealing with the general public and the Street, they can deal with a group of institutional investors that really understand their business and would probably be more supportive,” D’Loren said.
To help finance its activities in the U.S. and overseas, CAK earlier this year struck a deal to have Deutsche Banc finance its investment banking and restructuring deals. Deutsche Banc took an equity interest in the firm, joining Prudential Securities, which earlier invested in CAK.
With Koppelman at the helm, CAK has set its sights principally upon the music, film, publishing, sports and apparel industries. But D’Loren said CAK can do more for its clients than simply arrange financing.
“If Bill Blass wanted to make a deal with all the gentlemen of rock ‘n’ roll, we would get the licenses done,” D’Loren said. “If Bill wanted suits on Sting, if he wanted suits on Michael McDonald or anyone like that, there’s probably no one better in the world than Charles Koppelman to do that.”
D’Loren said he could “probably” arrange a deal for Calvin Klein, who has spent the better part of this year reviewing bids for his company, although Klein’s several licenses with Warnaco complicate matters. Both Warnaco and Klein would have to agree to a deal, he said.
The idea for CAK emerged from D’Loren’s experience creating somewhat similar asset-backed securities on behalf of a broad range of companies, he said. As part of his efforts to help reassure investors that the securities were good investments, D’Loren began to research the value of various companies after they filed for bankruptcy.
“And one of the things we learned over time was that the assets that brought more value in a bankruptcy proceeding were the trademarks and intellectual property rights,” D’Loren said. “So that started us thinking that perhaps the lending models were wrong.”
According to D’Loren, by making loans secured by hard assets like machinery, equipment and inventory, bankers are overlooking the most valuable collateral: a company’s designer names and brands. But to unlock the value of those intangible assets, D’Loren and Koppelman needed to create a structure that would allow lenders to be protected if the borrower declared bankruptcy.
The two executives solved the problem by creating the asset-backed deal structure. Although similar to some financing arrangements already prevalent in the music industry, CAK’s financing was the first of its type to be used in the apparel industry.
Under the arrangement, the trademarks and licenses of the borrower are permanently transferred to a new bankruptcy-protected company that receives the financing proceeds. The bankruptcy-protected company then licensees the marks back to the operating company and uses the licensing royalties from the operating company to repay its debt.
Because it would effectively transfer trademarks and other intellectual property outside of the operating company, it may prove a less attractive option for public firms than it is for private ones.
“We take what is, in most cases, a ‘single B’ credit rating and through structured finance, we get them to investment grade, which is ‘triple B’ or better,” D’Loren said. “What it brings to the company is long-term, fixed-rate financing at a good price. And because it is structured, and because we underwrite the gross margin and not the bottom line of the company, we can get them a lot more leverage.”
Because of the deal’s structure, if the operating company runs into difficulties, the lenders are protected because they have control of the brands and marks, D’Loren said. If the company runs into difficulties, the lenders have control of the trademarks and can terminate the licensing agreement and find a new manufacturer.
“The risks we have to structure around are the manufacturing risk and the bankruptcy risk,” D’Loren said. “We structure around those so that if something were to go wrong we have effective control of the brand and effective control of the licensing, without the risk of anything going wrong in manufacturing or of them going bankrupt.”
For 2000, D’Loren is aiming for a total deal volume of between $500 million and $600 million. About 30 percent of that will be from music deals, 20 percent will be in book publishing, 10 percent in apparel and the remainder in film and sports-related financing, he said.
Because of its unusual role as an investment bank that combines entertainment, fashion and finance skills, CAK is positioned to take advantage of convergence among fashion, entertainment and technology, D’Loren said.
“Ten years from now, children in China are going to be ordering Tommy Hilfiger clothing — if he’s still around — not through catalog sales, but through interactive television,” D’Loren said. “They’re going to see it; it’s going to be on some star. I think that brands are going to start aligning themselves more with stars.
“Tommy’s figured it out that’s why his sales have been through the roof in the last three or four years, but a lot of these companies haven’t figured it out yet. I think the ante is going to be raised over the next couple of years as all these convergences take place. So we think we’re in a unique position because we can make those relationships happen and we have access to the capital to do it.”