Securitizing landing rights

Here is an interesting story a new intangible-asset-backed securitization: landing rights at Heathrow.
From International Financing Review

Not quite property
The other notable innovation last week came when British Airways (now part of International Airlines Group) sold a US$250m due 2016 bond backed by landing slots at Heathrow airport.
The Bealine securitisation deal, which pays a coupon of 7.25%, will finance the £172.5m acquisition of bmi, agreed late in 2011.
When IAG bought bmi from Lufthansa, it acquired only four aircraft (the other 23 in bmi’s fleet were leased), but also 42 daily landing slots at Heathrow, which were also used as security for the acquisition payment instalments. This collateral was therefore naturally available as security for the acquisition debt.
Landing slots function like property – but not quite. They can only be owned by airlines with valid operating licences, can be removed if not used 80% of the time, and are not always counted on corporate balance sheets.
Yet these slots have monetary value, and form the major part of the collateral that pushes the securitisation to an Aa3/BBB (Moody’s/S&P) rating, from IAG’s B2/BB- unsecured rating.
The unique nature of the asset class has dictated the structure that can be used – in effect, the deal is a sale-and-leaseback of the “properties” where BA does its business. But it is structured like a whole business deal referencing a BA subsidiary.
The slots will be operated as a joint venture between BA and its subsidiary, where the subsidiary owns the slots but BA flies the aircraft. BA does not rent or lease the slots, as this is not possible given the nature of slot collateral, but it guarantees to pay the liabilities of the securitisation. To establish the subsidiary as a real, operating airline, rather than simply a holding vehicle, BA is also giving it a route to run (with borrowed BA aircraft and crew).
As the biggest risk to BA’s control over the slots is how regularly they are used, this is the key credit metric apart from BA’s corporate credit. Using slot pairs at Heathrow – an airport operating close to full capacity – is meant to give investors confidence, despite the unusual collateral.

Just one note. In the U.S., when the Federal government tried to auction off landing rights in the New York city area at back in 2008, the Government Accountability Office (GAO) ruled (backed by case law) that only tangible property is property. Therefore, the FAA could not auction off those landing rights under laws governing the disposition of government property. [See earlier postings.] As I understand it, the FAA finally withdrew the proposal. But the episode highlights the need to have a better policy for managing government intangible assets. The airlines clearly understand that landing right slots are an asset. The government should be able to treat them as assets as well. How it manages those assets for the public benefit (monetize versus public use) is another question. But that is a question we can’t begin to address unless and until we understand that these are assets to be managed — just like any other asset (e.g. public lands).

Select tweets 7/9/12 – 7/15/12

Select tweets and retweets from the past week:
9 Jul Ken Jarboe ‏@IntangibleEcon
Andrew Coulson: America Has Too Many Teachers http://on.wsj.com/NAfaV0 Pub. sch. teachers are “unproductive”? Strained argument for private ed.
9 Jul Ken Jarboe ‏@IntangibleEcon
Follow up to Coulson’s argument about too many teachers: Public schools have fewer teachers per students than private schools .
9 Jul Ken Jarboe ‏@IntangibleEcon
. . . so if you follow the argument that private schools are better, we need more teachers in pub. sch. to emulate the priv. sch. situation.
9 Jul Mary Adams ‏@maryadamsICA
Coming standards for reporting on Human Capital – Join conversation tomorrow AM with David Creelman and Laurie Bassi http://bit.ly/MSETeN
Retweeted by Ken Jarboe
10 Jul Ken Jarboe ‏@IntangibleEcon
British judge: Samsung tablets ‘not as cool’ as iPad, so they don’t infringe http://wapo.st/Nk6Lqa Clearly “cool” is a key intangible assets
10 Jul Ken Jarboe ‏@IntangibleEcon
America’s Fastest Growing Retailers http://business.time.com Verizon Wireless, Apple, AT&T Wireless are #2, 3, 4. Amazon #1 What does that say?
10 Jul Ken Jarboe ‏@IntangibleEcon
Bits: IT Spending to Hit $3.6 Trillion in 2012, Report Says http://nyti.ms/LBsfkH What is happening in retail is also happening in corporate.
10 Jul Ken Jarboe ‏@IntangibleEcon
PPI: List of companies investing in America http://j.mp/MfyiFx Unfortunately doesn’t include investments in intangible assets. No data?
10 Jul NewAmerica.net ‏@NewAmerica
We’re living in a start-up desert: An investigation into the startling decline of entrepreneurship in America: http://ow.ly/c9jD0
Retweeted by Ken Jarboe
11 Jul Michael Nelson ‏@MikeNelson
DARPA Gets a New Top Geek http://dthin.gs/MYZcXD
Retweeted by Ken Jarboe
11 Jul Ken Jarboe ‏@IntangibleEcon
WSJ: Airbus Tries New Way of Building Planes http://on.wsj.com/PKFxLW Boeing & Airbus realize need to keep expertise (intangible) in-house . . .
11 Jul Ken Jarboe ‏@IntangibleEcon
. . . and work on improving supply chain relations (another intangible) http://on.wsj.com/PKFxLW
11 Jul Michael Nelson ‏@MikeNelson
Is the Internet Making Us Crazy? What the New Research Says http://www.thedailybeast.com/newsweek/2012/ … via @newsweek
Retweeted by Ken Jarboe
11 Jul Mary Adams ‏@maryadamsICA
Great follow-up stream from our program yesterday on human capital reporting on ic knowledge center: http://ning.it/PLR25K
Retweeted by Ken Jarboe
11 Jul Mary Adams ‏@maryadamsICA
BV Resources: “95% of business valuation professionals still use the market approach” http://bit.ly/N1wFjW
Retweeted by Ken Jarboe
11 Jul Ken Jarboe ‏@IntangibleEcon
The Machine and the Garden http://nyti.ms/S0h2sI The economy as garden: government as “seeding useful activity and weeding harmful activity”
12 Jul Ken Jarboe ‏@IntangibleEcon
DARPA crowdsourcing tank design to speed up heavy weapons development http://www.gizmag.com/darpafang/2322 … via @gizmag Is this the future of manufacturing?
12 Jul Ken Jarboe ‏@IntangibleEcon
The glorious end of higher education’s monopoly on credibility http://ti.me/Mk8T3H Interesting, but there will still be role higher ed
12 Jul Clyde Prestowitz ‏@clydeprestowitz
If we want our industries to be competitive with China we need leaders willing to take action to defend key industries http://shar.es/tuOF6
Retweeted by Ken Jarboe
12 Jul Ken Jarboe ‏@IntangibleEcon
IVSC releases new booklet on valuation of intangibles http://www.ipvalue-site.com/index.php/2012 …

13 Jul robert atkinson ‏@robatkinsonitif
Post-Solyndra: New ITIF Blog on Principles of Government Investing in Business. http://bit.ly/Nn9MUI
Retweeted by Ken Jarboe
13 Jul Ken Jarboe ‏@IntangibleEcon
PAGE: The Tangible Effects of Austerity http://bit.ly/PSvN2s on investments in intangibles
14 Jul Ken Jarboe ‏@IntangibleEcon
WSJ: The Big War Over a Small Fruit http://on.wsj.com/M8023h Innovation comes in many forms
14 Jul Ken Jarboe ‏@IntangibleEcon
The Culture of Innovation http://shar.es/t4bwR Trying to decode Silicon Valley’s secret. It all about being a “needs seeker”, not about tech
14 Jul Ken Jarboe ‏@IntangibleEcon
The Workplace Benefits of Being Out of Touch http://nyti.ms/NiuBnQ

Update on OECD Intangibles project

In May of 2011, Athena Alliance organized a conference on New Building Blocks for Jobs and Economic Growth: Intangible Assets as Sources of Increased Productivity and Enterprise Value. (For more on the conference, see the New Building Blocks Forum). The conference served as the kick-off of a two year OECD project (see project website). OECD has recently published its interim report on New Sources of Growth: Knowledge-Based Capital Driving Investment and Productivity in the 21st Century.
The first part of the report discusses the importance of intangibles and provides the latest data on investments in intangibles for a number of countries. The data is far more comprehensive and cross-national that what was previously available.
One of the areas included — which does not get much attention in the U.S. — is the importance of design:

Beyond the physical appearance of products, design is often integral to all stages of the business process, from basic research to manufacture, marketing and after-sales services. One study in the United Kingdom suggests that design spending might be more than twice as large as business spending on R&D. And design plays important roles in innovation and firm performance. For instance:
   • A number of world-beating products owe at least part of their success to different facets of design. Research published in 2010 indicated that the iPhone had then added around USD30bn to the value of the Apple Corporation, with only 25% of this attributable to patentable technology stemming from R&D. Much of the rest arose because of Apple’s innovations in design, marketing and management. Companies in traditional industries such as textiles, apparel and furniture are also able to succeed based on design competencies. For instance, Italy has long had a successful furniture industry based largely on small and medium-sized firms with competitive advantages in design.
   • 67% of exporters in New Zealand have identified design as central to their commercial success.
   • In 2007, almost half of businesses in the United Kingdom believe design contributes to increased market share and turnover. And in 2004, among firms in the United Kingdom that saw design as integral to their business, nearly 70% had introduced a new product or service in the previous three years (compared to just 3% of companies in which design played no role).
The ‘Europe 2020 Flagship Initiative – Innovation Union’ includes design among its ten identified priorities. And further afield, China, India, Korea and Singapore have all enacted design policies and consider design to have strategic economic importance.

The remainder of the report specifically highlights the importance of a number of policy areas. These include:
   • human capital and skills shortages,
   • tax incentives for R&D and cross-border tax strategies,
   • competition/anti-trust policies in a digital economy with new business models,
   • the role of intellectual property rights in the innovation system,
   • the importance of entrepreneurship,
   • the need to improve corporate reporting of intangibles,
   • better measurement and data collection of both macroeconomic and micro-level statistics,
   • policies on the use of personal data (to balance privacy and economic value creation) and access to public data, and
   • mechanisms to finance innovative, knowledge-based companies.
I will not attempt to summarize all the key points under each of these. Rather I would urge you to read the report for yourself.
However, one point raised that I would like to highlight is the need for a comprehensive look at knowledge-based capital that goes beyond traditional technology policy:

Most OECD governments operate programmes that facilitate business’ access to research or technology-related advice and information, often from universities and public research organisations. These schemes – such as innovation vouchers, know-how funds and technical extension services – tend to focus on technological information (typically creating links to academics in science, technology, engineering and mathematics (STEM) disciplines). However, businesses interact with academics for a variety of reasons not restricted to technological development. In the United Kingdom, for instance, nearly a third of all academics from the arts and humanities are engaged with business in some way, as are nearly a half of academics from the creative arts and media. As well as knowledge related to STEM disciplines, businesses also search for assistance with marketing, sales and support services, as well as human resource management, logistics and procurement. Businesses require information and advice relating to many forms of KBC, some of which could be omitted from bridging programmes exclusively focused on STEM disciplines.

The importance of these non-STEM forms of knowledge are often forgotten in our policy debates. Thus I was very pleased to see it specifically addressed in the report.
The report also lays out projects ongoing workplan:

A policy-oriented conference will be held in early 2013, with publications being launched, in a variety of formats, on the following subjects: measurement of KBC and its effects on economic growth; improving tax policy for KBC; the creation of economic value from personal data; corporate reporting of business investment in KBC; knowledge networks and markets; and the role of KBC in global value chains. There will also be an overall project synthesis report and a report to the 2013 OECD Ministerial Council Meeting.

I am looking forward to these reports and activities.
By the way, the 2011 New Building Blocks conference report is now up on the OECD website at as well as on the Athena Alliance website. My own conference observations can be found on the Athena Alliance website.

Trade talks aren't about trade talks

Following on yesterday’s trade data, I want to draw your attention to a piece from CQ Today earlier this week on the Trans-Pacific Partnership (TPP) that argues “With Pacific Rim Talks, Trade Enters New Era”:

Because previous rounds of global trade negotiations wiped away many tariffs and quotas, companies are now focused more on domestic laws. And accelerating globalization has more tightly integrated trade laws and financial regulations, government procurement policies and a host of related matters.

They are completely right that trade is in a “new era.” But they got the dates wrong. Trade entered a new era in 1994 with the inclusion of TRIMS (Trade Related Investment Measures), TRIPS (Agreement on Trade-Related Aspects of Intellectual Property Rights) and GATS (General Agreement on Trade in Services) in the Uruguay Round. These moved trade negotiations past tariffs and at-the-border issue to internal economic and regulatory policies. Essentially, trade negotiations are actually economic integration and harmonization negotiations. [For example, on copyright laws — see National Journal’s Tech Daily for more.]
The problem with the shift to economic harmonization is that the old dynamics of negotiations don’t work. During my Senate staff career, I was involved in the beginning and the end of the Uruguay Round. When we finally passed the implementing legislation, I mused out loud that I thought this would be the last global round of trade negotiations. None of my colleagues agreed – and some of the old hands seemed taken aback at such heresy. They argued that you can only get an agreement by linking everything in a big package. (In diplomacy – this is known as “linkage.”)
Almost two decades later, I still think I am right. Linkage doesn’t work the way it used to. In previous negotiations, the focus was on tariff reduction. I’ll reduce my tariffs on steel if you reduce your tariffs on autos. This allowed for a win-win (from economists point of view) situation that pushed for lower and lower tariffs. Everyone agreed that the end point was lower tariffs. The question was how to get there.
In the new talks, it is unclear how the trade-offs work, and in what direction the dynamics points. I’ll lower my tariffs on steel if you increase your copyright protection to 100 years? I’ll allow you to subsidize your aircraft industry if you don’t ban my genetically-modified beef? I’ll decrease my agricultural subsidies if you reduce regulations on investment banking?
We don’t have any agreement on what the end point should be. We have a general idea – “open economies” – but we differ dramatically on what that means and on the specifics.
Thus my unease with large multi-issue, multilateral negotiations such at the TPP. I’m not sure we understand the trade-offs any more. And I’m not sure what we really want to accomplish in any one specific area [less regulation on the financial sector or more regulation?]. Rather, as I’ve argued before, we may have to approach each of these economic regulatory issues separately – possibly in separate forums, such as the OECD and the G20. Yes, this being a negotiation, there will be linkage. But the complex web of links will not become so great as to bring the entire structure down. And it will allow all parties to clearly focus on a specific issue not the trade-offs — leading, one would hope to a better outcome.

May trade in intangibles

Some good economic news this morning as the trade data released this morning by BEA shows the U.S. trade deficit dropped by $1.9 billion to $48.7 billion in May. Exports were up by $0.4 billion and imports were down by $1.6 billion. The decline was in line with economists’ expectations, according the Wall Street Journal.
The not-so-good news was that the improvement in the deficit was due to a sharp decline in oil imports (down by over $3.2 billion) which was the result of lower oil prices. Imports of non-petroleum goods increased and overall exports were basically unchanged. While decreasing oil imports is an important step to lowering the trade deficit, getting the non-petroleum goods deficit down is also key. Lower oil prices help, but solving our trade problem will take more than lower oil prices. And in the regard, the overall trend over the past year and a half has not been good – with the non-petroleum goods deficit generally increasing while the petroleum goods deficit generally holding steady.
The somewhat-good news is that our trade surplus in intangibles improved in May after declining in April. The intangibles surplus was up ever so slightly (by $99 million) to just over $13 billion. Royalty payments increased slightly, with both exports (payments received) and imports (payments paid out) up. Business services also saw an increase in exports of $227 million and in imports of $144 million.
The bad news concerns the deficit in Advanced Technology Products, which surged by over $2 billion in May to $8.7 billion. The overall decline was lead by an increase in information and communications technology (ICT) imports, reversing April’s big import drop. But almost every other category saw a deterioration of this trade position as well (flexible manufacturing, electronics and weapons being the exceptions). The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
Intangibles trade-May12.gif
Intangibles and goods-May12.gif
Oil good intangibles-May12.gif

Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:


Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.


Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Equipment depreciation is a limited economic tool to spur the knowledge economy

Later this afternoon, the Senate will vote whether or not to proceed to consider a piece of legislation to help small businesses. Part of that legislation extends the existing bonus depreciation for purchase of equipment — creating a tax break for that spending.
Last year, the on-line journal The Economists’ Voice published an article on “Should the Government Invest, or Try to Spur Private Investment?”:

The U.S. economy clearly needs stimulation, but the Obama administration’s plan for accelerated depreciation is an ‘old economy’ approach to stimulating aggregate investment and unlikely to ease the Great Recession, according to Michael Cragg of Brattle Group and Joseph Stiglitz of Columbia University. The authors suggest alternative policies consisting of carefully designed carrots and sticks.

As I noted in my comment in the article (also published in The Economists’ Voice), Drs. Cragg and Stigliz are exactly correct when they point out that accelerated depreciation is a limited tool — as they put it “an ‘old economy’ approach to stimulating investment.” However, they only touch upon the reason. Accelerated depreciation applies to tangible plant and equipment. Yet, as numerous studies have shown, the composition of investment and capital formation has shifted from tangible plant and equipment to intangibles. Since investments intangibles are generally expensed rather than depreciated, any accelerated depreciation schedule completely misses the mark.
Investment tax credits are the more appropriate tool. But our policy toward tax credits for intangibles is weak at best. The Research and Experimentation Tax Credit (commonly referred to as the R&D tax credit) fights off near-death experiences on a route basis. It is also more limited in scope and scale than what is available in other developed nations. Investment incentives for other intangibles, most notably worker training, are completely absent. If we are to move beyond “old economy,” we need to focus on policy ways to provide incentives for investment in intangibles.
As I have argued too many times to recount, one policy change would be to turn the R&D tax credit into a broader knowledge tax credit. A knowledge tax credit would apply to company expenditures on worker training and education — just like the R&D tax credit applies to expenditures on research activities. In only make sense that boosting worker skill levels is a necessary compliment to any activities to raise innovation and productivity. After all, innovation doesn’t come solely from the lab any more.
It also makes sense to pair the knowledge tax credit with any efforts to incentivize increased investment in plant and equipment. If we give companies incentives to conduct research or invest in new equipment we should also give companies incentives to invest in their most valuable asset: their workers.
Likewise, the knowledge tax credit could be paired with any job sharing programs that compensate workers for lost wages due to working fewer hours. Rather than reduce their hours, a tax credit could be given for workers spending those hours for training, either on-the-job training or in the classroom. This would have a dual effect. It would increase our human capital — a major input to productivity and economic growth. And it would immediately increase consumer demand as companies would use the funds to pay workers to take classes (thereby creating more employments slots for others to fill the working hours of those in the classes).
Thus, I would argue that regardless of what the Senate does today, use of accelerated depreciation as a tool of economic stimulus is increasingly less effective “old economy” policy. We need to think more creatively about what tax policy would work in this new situation. Key to that effort is focusing on incentives for increased investment in intangible assets.

Select tweets 6/18/12 – 7/8/12

Select tweets and re-tweets from the past two weeks: