Thursday, 19 March 2009

IP securitisation in Italy

This note has been kindly provided for IP Finance by Chiara Ortolani, an Erasmus Scholar from the University of Bologna who is at present in residence at the London office of Olswang:
"When considering the intangible nature of intellectual property, perhaps it is not surprising that securitisations in this field have not become everyday, well-publicised transactions. Each type of intellectual property comes with its own peculiar set of complexities and unknown risks that are not common to commercial ventures involving tangible property" K. W. Medansky and A. D. Dalinka
As of March 2009, no public information has been made available about IP securitisation in the Italian market. However, given that the transparency of financial markets is only one species of capitalist utopia and that IP securitisations are less publicised than other kinds of transaction, we can assume that IP securitisation is a process which is extremely rare (if it has ever happened) in the Italian market.

Why hasn't a traditionally illiquid and bank-oriented market like that of Italy discovered IP securitisation? There are at least two answers: first, the Italian rules on securitisation date from 1999: even though some securitisations had been arranged since 1990 using foreign vehicles, uncertainty about the protection of the investors and the conflict between laws slowed the development of this financial process, which in the same period was already used in the US and UK markets.

Secondly, the Italian market has a very peculiar composition: a large proportion of economic operators are represented by small or medium family-owned businesses which are unable to bear the costs involved by securitisation. Furthermore, since the banks have never shown a real interest in IP securitisation, this can be considered a relevant factor, if not a proper reason, in our analysis.

Focusing on the Italian rules about securitisation, provided by Act 130/1999, they statute a wide definition of the assets which the originator can pool and sell to a special purpose vehicle (SPV), simply specifying that the assets have to be pecuniary credits, already existing or existing in the future (Art. 1). This means that every kind of asset, including IP assets, can be pooled and sold to the SPV to start off a securitisation. The Italian rules are at the same time careful to protect investors, stipulating that the rules for public offerings of financial instruments are to be applied to some phases of the process of securitization (Art. 2), that the SPV has to meet strict requirements to do this activity (Art. 3) and prescribing that some of the rules of banking and financial transactions are to be applied to securitisations (Articles 4 and 5).

There are still many live issues concerning this Act: in particular, the function of Italian SPVs is completely different from the role of US and UK SPVs, because the Italian ones are businesses which can manage assets from different originators (they have been defined "multi-seller" for that reason), with a high risk of conflict of interests. Furthermore, the Act doesn't provide any definition of the financial instruments which the SPV will use to obtain funds from the investors and doesn’t specify if they are shares, bonds, credit derivatives or hybrid securities. This omission leads to huge problems in applying the protection to investors. However, some authors say the Act on securitisation can only provide a legislative framework but does not cover all the issues which securitisation raises.

The Italian rules neither forbid nor limit IP securitisation, but the key issue is whether the characteristics of the Italian market can stop the development of this financial process, which is actually one the most affected by the financial crisis. Predictions as to the survival of IP securitisation in the financial markets are pessimistic because of the decreasing answer of securities, the pressure put on banks by the recession and the prohibitive costs of assets on the secondary market. No predictions can be offered where unpredictability is the rule, but one may focus on the "set of complexities and unknown risks" of IP securitization to understand if there are opportunities for the diffusion of this instrument in the Italian market.

In general the two main problems involved in the diffusion of IP securitisation are the lack of common and widely accepted valuation methodologies for IP assets and the volatility of the IP market. The effective degree of success of a film or of a song, as well as the degree of use of a trade mark or of a design, is unpredictable in the absence of a specific framework for evaluation and the value of these intangible assets; further, the rating of financial products used to obtain funds definitely relies on the prediction of successful diffusion of the IP assets (copyrights, trade marks, designs, patents). For that reason the valuation of IP assets made by banks and financial institutions needs a generally accepted methodology, able to ensure to businesses a global assessment of their securitisation plans, not solely based on the reputation of the originator or of his brand.

There are some trans-national challenges to overcome in the process of development and diffusion of IP securitisation. This process can't succeed without a generally accepted framework for valuation of IP assets, new international rules which allow IP owners to gain access to affordable credit through specific procedures and a strong awareness of the potentiality of this finance process between the economic and legal operators. Some domestic challenges face the Italian market and its players: IP securitisation is a not completely explored field and, for that reason, new solutions can be found to enable the Italian market to take advantage of IP securitisation. There is no evidence that this kind of securitisation can't work in a bank-oriented financial system -- the challenge is understanding how.

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