Collateralizing intangibles

Ford Motor Company wants to borrow money. Lots of money. $18 billion to be exact.
Normally, that would not be big news. It would be some news for the corporate bond market. But this is generally routine news.
What is newsworthy about this borrowing is how Ford plans to do it. Rather than sell normal corporate bonds (with a rating at junk bond levels), Ford is selling bonds backed by some of their assets. As the Wall Street Journal reported:

In arranging to borrow as much as $18 billion, Ford Motor Co. is making a massive bet that by pledging its assets as collateral, it can take advantage of buoyant debt markets to help pay for a difficult and costly restructuring.

This is not completely unusual. As the Journal goes on to say:

Ford isn’t alone in being forced to back its borrowing with hard assets. Earlier this month, General Motors Corp. pledged some equipment assets as collateral for a $1.5 billion loan and arranged earlier in the year for a $4.6 billion secured credit line, which, like a credit card, can be tapped when needed.

What is noteworthy is the mix of assets Ford is using. Its not just hard assets. According to the Washington Post:

Among the other assets Ford was using as collateral are its intellectual property, such as patents or significant trademarks; real estate; and its automotive financing unit, Ford Motor Credit.

It also apparently includes the Volvo brand, which Ford owns.
A few years ago, bankers would not touch intangibles as collateral. Now I hear from financial advisors and valuation specialist that they are getting more calls about using intangibles as part of a larger loan package (as Ford is doing). I suspect we will see more of the deals in the future. And as the market becomes more familiar and comfortable using intangibles as part of a package, we are likely to see stand-alone type of deals – where the intangible assets are the only collateral used. This is already happening in the securitization arena. Look for this type of financing to spread.

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