# Driver 1. Financial Readiness

> Part of the *Music ABS and Institutional Readiness* knowledge base, Part III (The Five Drivers). See `03 - The Five Drivers (overview).md` for the driver framework and `INDEX.md` for the full pack map.

Financial Readiness rests on two questions: whether the collateral can support investment-grade credit on its own merits and whether the platform can absorb the fixed costs of rated execution. The deal economics work only when both answers are positive. The right place to start is with the collateral side, because rights composition, vintage depth, and pool diversification together determine the rating-committee floor on advance rates and discount rates before any structuring layer is applied.

## Catalog composition and durability

Catalog composition is the first variable a rating committee assesses, across three attributes: administration depth, vintage, and pool diversification. The first of these reaches the committee through the documented collections record rather than through a categorical distinction between active and passive pools. Catalogs with weaker capture across PRO registration, sub-publisher coverage, synchronization, and collection auditing show up in that record as lower realized cash flows, which translates into higher discount rates and lower advance ratios at the deal level. The resulting pricing differential is among the principal contributors to the spread between the highest and lowest priced transactions in the rated record. Building that capture capability into the acquisition function before a debut allows a platform to reduce operational build in the lead up to the ratings process and arrive with a collections history that supports tight pricing.

Vintage depth follows the same logic, since older works carry more predictable cash flows after generating royalties across multiple rate cycles, but the rated record shows that the market supports a wide range of vintage profiles. Lyra's 47,000-work catalog, at its 2025-1 issuance, carried a weighted-average asset age near 21 years with about 3% of assets under five years old. Lyra 2024-2/3 and Concord (TUNES) 2024-1 each run over 40% of their catalogs in songs older than twenty years while Kobalt 2024-1 skews newer. Newer vintage still meets rating agency standards when diversification and statistical underwriting can compensate, as Thomas Smyth, CFO of Duetti, describes:

> "The key point was demonstrating that a diversified pool of rights can collectively produce stable aggregate cash flows when underwritten and managed appropriately. Rather than relying on the continued performance of a smaller number of legacy catalogs, the Duetti portfolio benefits from diversification across thousands of tracks and artists with a wide range of listener cohorts and consumption patterns."
> — Thomas Smyth, CFO, Duetti

A platform that builds breadth deliberately can clear the rating committee without a legacy catalog to lean on, opening the rated market to issuers outside the seasoned-catalog model.

Diversification, the third lever, is the structural complement to vintage, and the rated record spans a wide concentration range, from Concord 2024-1 at 8.1% top-10 concentration across 1.3 million assets to Hipgnosis Music Assets 2022-1 near 40% of revenue in its top ten. Comparable ratings can hold across that range, but a more concentrated pool may be penalized and must clear a higher threshold, with the rating supported only where the underlying collateral can sustain stress scenarios applied to top artists and top works. Where higher OC and tighter DSCR triggers do appear, they tend to track younger vintage pools or collateral that cannot absorb those haircuts, rather than scaling directly with concentration. Pricing reflects a similar pattern; Canon 2026-1, diversified across more than 3,750 works, priced at +160 bp to swaps in April 2026, while Duetti's $205 million master trust in January 2026 showed the structure works for newer-vintage independent collateral when breadth is sufficient. Robert Sherman, Partner at DLA Piper LLP, frames the inaugural rated transactions for independent artist pools as "a proof that rated financing based on pools of independent music assets have gained acceptance in the marketplace." The structuring side carries its own considerations. Salina Sabri describes how Barclays has approached structuring its rated transactions backed by younger or independent catalog pools:

> "For younger collateral pools where cash flows may be expected to exhibit some level of decay, we may structure transactions with higher opening DSCR levels or differentiated covenant protections to provide additional downside protection while still achieving the issuer's financing objectives."
> — Salina Sabri, Managing Director, Barclays

> **Pull Quote:** "One of the strengths of a large and diversified pool of music product is that any issues arising with an individual asset are less likely to have a material impact on the overall performance of the financing based on the pool."
> — Robert Sherman, Partner, DLA Piper LLP

Termination exposure is a related composition variable that follows from vintage depth, because the U.S. Copyright Act's 35-year recapture window comes into play as catalog vintage approaches that horizon. Funds that assembled portfolios in 2018 to 2022 may hold rights approaching that window. KBRA's Kobalt 2024-1 new-issue report noted no statutory termination windows occurring within the next 30 years, with roughly 1% of the catalog by value subject to contractual reversion or termination, and the structure was credited because no recapture notices had been filed and the earliest possible effective termination sat beyond a 30-year forward horizon. Robert Sherman describes the standard treatment:

> "While valuation firms customarily model a loss of value at the time of any known statutory termination or contractual reversion with respect to music product, as it's not unusual for parties to agree to extend or regrant rights in the relevant work to the existing rightsholder, any such work would be picked up in the succeeding annual valuation."
> — Robert Sherman, Partner, DLA Piper LLP

That treatment isolates termination exposure from base-case cash flow assumptions and is part of the reason termination-eligible vintage does not on its own preclude investment-grade execution.

## Scale and deal economics

Once the catalog supports investment-grade credit on the rights, vintage, and diversification dimensions, the second financial readiness question is whether the platform can absorb the fixed costs of rated execution. Inaugural rated deals carry first-time-issuer execution costs (legal, rating agency, structuring, backup servicer setup) in the $5 to $10 million range, and the deal must be large enough that the financing advantage over bilateral execution exceeds those costs. The resulting working threshold sits materially lower than the billion-dollar assumption would suggest. Rated term music ABS deals in the public record have ranged from $221.65 million (Hipgnosis MUSIC 2022-1) to $1.765 billion (Concord 2025), and practitioners pricing a debut today plan around roughly $250 million in rated notes supported by $400 million-plus in appraised catalog value as the working figure. At that scale, the financing benefit clears the bilateral comparison comfortably, and the structure amortizes incremental fixed costs across all subsequent series under the master trust. That same structure also lets a platform debut before it has assembled its full catalog. Through a delayed-draw feature, the trust can raise additional notes after closing to fund future acquisitions. Stéphane Rummelhard, Director and Head of Royalties and Asset-Based Equity at M&G Investments, which anchors Seeker, describes what the rating agencies underwrote to allow that forward capacity:

> "This feature required rating agencies and investors to take a view not only on the existing collateral pool, but also on the quality of Seeker's acquisition discipline. The objective was to demonstrate that future acquisitions would be made applying the same underwriting standards and would enhance, rather than dilute, the overall credit profile of the collateral pool."
> — Stéphane Rummelhard, Head of Royalties & Asset-Based Equity, M&G Investments

The platform's acquisition discipline, in other words, is what lets it grow trust over time rather than assemble the final scale before reaching the rated market at all. As such, more platforms are within reach of rated execution than have considered it.

> **Pull Quote:** "Potential issuers may mistakenly believe they need to put together a billion dollar deal for an ABS transaction to make sense. In fact, we've advised on a number of smaller deals. For issuers looking at a private ABS, it's possible to put together a successful deal as low as $100 million. The beauty of setting up an ABS platform is that you can start small and continue to build on it."
> — Claire Hall, Partner, DLA Piper LLP

## Valuation discipline and LTV calibration

Financial readiness extends past the deal-economics floor to the valuation discipline that underwrites the headline LTV. Third-party LTV ratios across the rated record run from the low 40s to 65%, with base-case DSCR thresholds of 1.05x to 1.50x and a trailing DSCR cushion of 1.5x to 1.8x as the practical investment-grade standard. The underlevering at debut is a deliberate master trust calibration as opposed to conservatism, since holding advance rates below the available ceiling preserves equity capacity at the SPV for subsequent series, which draw at progressively lower marginal cost as overhead amortizes, with Concord 2022-1 a prime example of this logic. The headline LTV itself is anchored by the discount rate applied in third-party valuation, and because these valuations discount long-dated cash flows, the rate the appraiser selects drives valuation more than year-to-year collections do. Under standard DCF, a 1% cut in the discount rate lifts catalog value into the high teens to low twenties percent. The headline figure can therefore move materially with no change in cash flow.

That sensitivity makes the governance around the discount-rate input central to the credibility of the deal. Disclosed third-party valuations across the rated record have applied pre-tax discount rates in a 7% to 8.25% band, from 7% on Hi-Fi Music IP to 8.25% on Concord and Lyra, with higher rates reserved for less seasoned or futures collateral. Hipgnosis Songs Fund disclosed that a 50 bp increase in its discount rate implied roughly an 8% reduction in fair value, one issuer's illustration of how far a valuation can move on the rate assumption alone. Single-appraiser concentration amplifies the risk, since one valuer's input change can move the implied LTV by more than the change itself, with no second methodology to cross-check it. Aircraft ABS experienced the same problem in 2001 and migrated to multi-appraiser averaging under ISTAT-certified methodology, and that playbook applies directly here, namely multi-appraiser averaging, disclosed discount-rate sensitivity tables in offering documents, and rating-agency stress tests that vary the discount rate across a conservative range, which together would limit how far a single valuer's selection can move LTV protection across vintages. Valuation governance therefore belongs in financial readiness, alongside stressed LTV modeling and DSCR triggers sized to absorb rate-cycle variance.

Beyond the valuation governance question, rate sensitivity shows up at the market level through issuance volume, which correlates inversely with long-term rates as higher rates compress the LTVs achievable at any given DSCR target. The stability of private-market multiples through the 2021 to 2024 rate doubling suggests the structural advantages of rated execution have helped offset that pressure. Hipgnosis Songs Fund's 2024 take-private at a 1.5x premium to its prior public valuation, against a Shot Tower assessment roughly $850 million below carried value, illustrates the dynamic. The same collateral that subsequently underwrote Recognition's Lyra ABS program had been trading in a public fund at a discount to its transactional value. That discount widened through the rate cycle even as the catalog's transaction value held, reflecting a divergence between fund-level sentiment and the cash flows the assets actually produced. A sustained return to higher long-end rates would compress issuance by tightening LTVs and lengthening refinancing, slowing the institutionalization trajectory rather than reversing it, since the asset class's structural foundations have shown measurable resilience through the post-2022 cycle.

Beyond catalog composition and valuation calibration, financial readiness includes anticipating the analytical gap between an issuer's internal underwriting framework and the rating-agency lens. Thomas Smyth describes the divergence directly:

> "Duetti's internal underwriting framework is designed primarily for selection and individual catalog pricing, whereas rating agency analysis is more focused on downside resilience and debt repayment under stress conditions. Naturally, debt investors and ratings agencies are focused on downside scenarios and structural protection. This leads to conservative forecasting and generally not taking into consideration upside participation and long-term value creation which we see in our portfolio and expect to continue."
> — Thomas Smyth, CFO, Duetti

For platforms approaching debut, the rating committee will apply downside-focused assumptions even where the platform's own view is more constructive. Structural cushions (DSCR triggers, OC depth, reserve accounts) are calibrated to absorb that conservatism.

## Regulatory and capital requirements

Beyond the deal-economics floor, three regulatory regimes shape how a platform structures around rated execution, namely Dodd-Frank risk retention, the Investment Company Act of 1940, and ERISA. Each is addressable on a different timeline, and treating them as fund-construction inputs rather than transaction-level costs is what separates platforms that reach debut on schedule from those rebuilding structures in the run-up.

Dodd-Frank requires the sponsor to retain at least 5% of the credit risk for the life of the deal, usually as a horizontal residual interest that corresponds to the sponsor's continued equity in the catalog. In practice, the retention is held as a Variable Funding Note or an unrated subordinate tranche. Because it cannot be hedged or transferred, it is a permanent capital allocation rather than a transaction cost, at $12.5 million on a $250 million debut and roughly $88 million on the $1.765 billion Concord 2025 deal. For a fund managing $500 million of LP capital that allocation directly affects fund-level IRR, but it is a known input that can be built into fund sizing and capital-call mechanics at formation, which is part of what makes rated execution workable at sub-billion-dollar sizes.

The Investment Company Act of 1940 framework defines the conditions under which the SPV avoids registering as an investment company itself. The relevant exemption requires either rating in one of the top four NRSRO categories or distribution limited to qualified institutional buyers (QIBs), along with trustee independence from the sponsor. Maintaining QIB-only distribution under Rule 144A regardless of rating satisfies the exemption and is the path most rated transactions have taken given the Regulation AB constraints in Part II. Engaging counsel at the structure-design phase keeps this off the critical path.

ERISA matters most for sponsors targeting pension capital. The senior rated notes are generally eligible plan assets without look-through, but subordinate tranches may need workarounds such as transfer restrictions or benefit-plan-investor caps to keep pension investors from being treated as direct owners of a plan asset. The decision is whether the capital strategy depends on pensions taking subordinate paper, and if so, ERISA counsel should be involved at structure design, while if not, senior eligibility carries through unmodified. Bank capital and international frameworks are additional considerations that shape demand rather than structuring. The March 2026 Basel III Endgame re-proposal arrived more accommodative than the 2023 version, and EU and UK securitization rules impose investor-side due-diligence and risk-retention requirements that platforms with European LP bases coordinate around through counsel.

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**See also:** `03b - Operational Maturity.md` (the administration capability that supports the underwriting assumptions above) · `02 - Structure of Music ABS.md` (where OC, DSCR triggers, and reserve mechanics fit structurally) · `05 - Path Forward.md` for the checklist version of these requirements.
