# Part II. Structure of Music ABS

> Part of the *Music ABS and Institutional Readiness* knowledge base. See `INDEX.md` for the full map. Read `01 - Market History.md` for the market context that produced these structures.

## The Royalty Cash Flow Stack

The choice of structure rests on a more basic question: what makes the underlying cash flows different from any other ABS pool? Rather than a discrete amortizing receivable, the collateral is a portfolio of IP interests generating recurring royalty income across multiple collection channels, each with its own reporting cadence, collection lag, administrative complexity, and legal framework. Understanding those channels is prerequisite to understanding why operational maturity correlates so directly with credit outcomes.

Three structural features distinguish music royalty cash flows from a typical ABS pool, and each shapes the structuring response in different ways.

- **Staggered collection timing.** Reporting across digital service providers (DSP), PROs, and foreign societies can range from 60 days to 24 months. Rated transactions absorb that variability through reserve sizing and trailing debt service coverage ratio (DSCR) calculation rather than forward-looking projections.
- **Concentrated counterparty exposure.** Master-side counterparty exposure is structurally distinct from the diversified consumer counterparty profile of traditional ABS because a few large DSPs receive most of the streaming volume, as Universal's 2024 catalog withdrawal from TikTok illustrated.
- **International cash flow exposure.** Approximately 48% of the net royalties within Recognition's Lyra collateral pool were in non-U.S. currencies, adding currency, withholding tax, and sub-publisher counterparty layers that domestic-only consumer ABS pools do not face.

The timing, counterparty, and jurisdictional profiles of the royalties determine the reserve levels, trigger thresholds, and tenor the structure can support.

Unlike receivables pools where cash arrives once the borrower pays, a music catalog produces its income efficiently if someone is actively working to collect it. Active administration, ensuring the catalog is paid what it's owed, involves registering every composition and recording across PROs, the MLC, SoundExchange, and foreign societies, keeping splits and metadata clean so payments match correctly, pursuing sub-publishing and synchronization income, and auditing statements to recover what would otherwise sit in unmatched black-box pools. The same underlying rights generate materially different collections depending on how well that work is done, and because valuation agents model projections based on a catalog's realized collection history, stronger administration raises the cash flow base that downstream estimates are built on. Salina Sabri describes the depth of platform-side infrastructure that rated execution now assumes:

> "Although these assets generate recurring cash flows largely on a passive basis, operational capabilities remain an important diligence consideration for rating agencies and investors. Companies that have successfully accessed the securitization market tend to have built out robust internal infrastructure to ensure appropriate rights administration, collections oversight, and a data-driven approach to underwriting, portfolio monitoring and portfolio optimization."
> — Salina Sabri, Managing Director, Barclays

Operational depth therefore shapes both the quality of the collateral and the diligence rating agencies and investors apply to it.

## Financing Pathways Available to Music Platforms

Music royalty cash flows are performance-based and effectively perpetual rather than self-liquidating, which places music ABS outside Regulation AB II's registered-securities framework. Rated music ABS to date has generally issued under Rule 144A, with Section 4(a)(2) covering a subset of transactions where direct issuer-investor relationships are most central to the structure. The disclosure regime is correspondingly lighter than Regulation AB II demands, balanced by reliance on rating-agency surveillance, trustee reports, and concentrated institutional buyer-base accountability.

### Chart: Financing Routes Across the Platform Lifecycle

![Financing Routes Across the Platform Lifecycle](../4.%20Reference%20Charts%20(optional)/05%20-%20Financing%20Routes%20Across%20the%20Platform%20Lifecycle.png)

Sources: KBRA presale reports, Bloomberg, cbonds.com, SEC NPORT-P, HSF press releases, HarbourView and Influence Media press coverage.

**Chart data:**

| Financing Path | Category | 1. Inception (catalog <$50M, no track record) | 2. Scaling (catalog $50M–$200M, building toward ABS) | 3. First Securitization (catalog $250M+, inaugural deal) | 4. Repeat Issuance (master-trust, multi-vintage access) |
| :--- | :--- | :--- | :--- | :--- | :--- |
| Sponsor equity | Sponsor | ✓ primary | ✓ residual | ✓ retained risk piece | ✓ retained risk piece |
| Syndicated bank credit | Bilateral | rarely available at this stage | ✓ common | optional bridge | rare |
| Private credit / direct lending | Bilateral | ✓ achievable once asset base supports underwriting | ✓ common | optional bridge | rare |
| Warehouse facility | Bilateral | unavailable | ✓ common term-to-securitization wrapper | refinanced into ABS at takeout | rare |
| Syndicated bank RCF | Syndicated | unavailable | optional for largest sponsors | optional | rare |
| Privately placed unrated catalog notes | Private | unavailable | feasible for sponsored platforms with disclosure depth | feasible (4(a)(2)) | feasible alongside rated |
| Publicly rated ABS — inaugural | Publicly rated | unavailable | unavailable | ✓ debut | n/a |
| Publicly rated ABS — repeat under master trust | Publicly rated | unavailable | unavailable | n/a | ✓ standard |
| Publicly rated ABS — extended-tenor tranches (7y, 10y) | Publicly rated | unavailable | unavailable | rare | ✓ available for seasoned issuers |
| Privately placed rated ABS (e.g. legacy single-deal SPV) | Privately rated | unavailable | feasible for sponsored platforms | feasible | feasible |

Within the 144A universe, the choice between broadly marketed 144A and negotiated 4(a)(2) execution is based on information symmetry between issuer and investor. Salina Sabri describes this counterintuitive dynamic:

> "For many issuers, the decision between a 4(a)(2) and a broadly marketed 144A transaction is often driven by confidentiality considerations. In private transactions where investors are under NDA, companies are more comfortably able to share granular data around the underlying portfolio, acquisition pipeline (not typically shared in 144A transactions), operating strategy and historical performance. This can be particularly valuable for transactions backed by differentiated collateral or transactions raising delayed-draw capacity, while also helping companies maintain confidentiality around commercially sensitive information."
> — Salina Sabri, Managing Director, Barclays

Pricing differentials between the two formats have largely compressed across recent vintages, and the strategic case for 4(a)(2) increasingly rests on what an issuer can disclose privately that supports tighter pricing through deeper diligence rather than on what it can withhold from public view. The same logic underwrites why master trusts issuing under 4(a)(2) often clear delayed-draw and pipeline-disclosure terms that 144A documentation cannot accommodate.

Within the rated execution end of the spectrum, three distinct strategic positions have emerged.

- **Scaled platforms with recurring issuance.** These platforms (e.g. Concord, Recognition, Kobalt) compete on cost-of-capital advantage and term-structure depth across diversified catalogs at scale.
- **Newer-vintage platforms building to legacy standards.** These platforms reach rated execution by building operational and data infrastructure to legacy-platform standards even where vintage depth is shallower, with Duetti as an example in private ratings and Seeker as a multi-agency rated analog under M&G's anchor. Thomas Smyth describes how the indie-collateral profile reframes the underwriting conversation:

  > "A large part of the education process [for Duetti] was reframing how investors and rating agencies think about diversification within music rights. Traditional music ABS transactions have focused on a relatively small number of legacy catalogs with longer operating histories. Our collateral pool is structured differently: a much broader set of independent artist and songwriter rights diversified across artists, works, genres, geographies, and platforms."
  > — Thomas Smyth, CFO, Duetti

- **Joint-venture vehicles.** Vehicles between fund sponsors and operating partners are the third position, exemplified by Chord Music Partners between Dundee Partners and Universal Music Group. JV structures compress time-to-debut by drawing on the operating partner's infrastructure but share economics; standalone platforms preserve full equity claim and strategic flexibility but build institutional infrastructure from scratch.

Both routes access the same rated execution and the same institutional buyer base, and the trade-off between them sits between time-to-debut and full equity claim.

## Structural Mechanics of a Modern Music ABS

The cash flow protections institutional buyers underwrite come from three structural layers working together, each calibrated against the volatility profile rating committees model into stress scenarios.

1. **Overcollateralization (OC).** Catalog value held in the SPV runs meaningfully higher than the notes outstanding to absorb cash flow variability before noteholders experience loss. Rated deals typically run 1.5x to 2.5x coverage. Kobalt 2024-1 senior carries roughly 35% OC; Concord 2024 roughly 52%.
2. **Interest reserve accounts.** Reserves are funded at closing to cover six to twelve months of senior interest and fees, bridging the timing mismatch between royalty inflows and debt service.
3. **DSCR-based cash trap triggers.** Triggers convert static cushion into automatic protective responses if performance deteriorates, activating at defined ratios without requiring action from the issuer or servicer. Varying step thresholds in the structure include:
    - **Cash trap.** Excess cash is diverted to the reserve at moderate deterioration.
    - **Full cash trap.** All excess cash is captured at deeper deterioration.
    - **Rapid amortization.** All available cash is redirected to senior principal repayment at the deepest level.

The dual-maturity construction layered over those static and trigger protections gives the issuer flexibility without compromising noteholder protection. The ARD, typically 5 to 10 years out, is the date the issuer plans to refinance and can choose its timing into the market. The legal final, typically 40 years out (2062 to 2076 for current deals), reflects copyright durability and is set well beyond any reasonable refinancing horizon. If refinancing does not occur at the ARD, the structure shifts to full-turbo amortization, directing all available cash to senior principal until the notes are retired, a construction that makes the asset class workable for fund managers thinking about exits and successor vintages. The ARD gives a planned refinance window, and the legal final gives noteholders a contractually enforceable backstop that does not depend on capital markets conditions at the ARD date.

### Chart: Music Royalty ABS Cash Flow Waterfall

```mermaid
flowchart TD
    DSP[DSPs<br/><i>Spotify, Apple, Amazon, etc.</i>]
    PRO[PROs<br/><i>ASCAP, BMI, SESAC, GMR</i>]
    MLC[MLC]
    SE[SoundExchange]
    SUB[Sub-Publishers<br/><i>foreign territories</i>]

    DSP --> LB
    PRO --> LB
    MLC --> LB
    SE --> LB
    SUB --> LB

    LB[Collection Account / Lockbox]
    TR[Indenture Trustee<br/><i>allocates per priority below</i>]

    LB --> TR
    TR --> P1

    P1[<b>1. Senior Fees &amp; Expenses</b><br/>trustee, servicer, backup servicer,<br/>rating-agency fees]
    P2[<b>2. Class A Interest</b><br/>→ Class A noteholders]
    P3[<b>3. Class A Principal</b><br/>scheduled, or turbo if past ARD]
    P4[<b>4. Class B Interest</b><br/>→ Class B noteholders]
    P5[<b>5. Class B Principal</b><br/>→ Class B noteholders]
    P6[<b>6. Reserve Account Replenishment</b><br/>up to target balance]
    P7[<b>7. Residual Cash Flow</b><br/>→ Issuer / Equity Holder]

    P1 --> P2 --> P3 --> P4 --> P5 --> P6 --> P7

    TRIG{{"DSCR triggers can redirect cash<br/>at steps 6/7 back into senior principal<br/>before any residual reaches the equity holder"}}
    P5 -.-> TRIG
    TRIG -.-> P3

    classDef source fill:#e8f0fe,stroke:#3b5fa3,color:#0c2545
    classDef hub fill:#fff7d6,stroke:#9d7c2b,color:#3d2f00
    classDef priority fill:#f3f3f5,stroke:#666,color:#1a1a1a
    classDef equity fill:#d9ead3,stroke:#3c763d,color:#1e4620
    classDef trigger fill:#fce5e5,stroke:#a94442,color:#4a1212

    class DSP,PRO,MLC,SE,SUB source
    class LB,TR hub
    class P1,P2,P3,P4,P5,P6 priority
    class P7 equity
    class TRIG trigger
```

> *The diagram above is the canonical waterfall. If your chat tool does not render Mermaid, see the equivalent table below, or the source PNG at `../4.%20Reference%20Charts%20(optional)/06%20-%20Music%20Royalty%20ABS%20Cash%20Flow%20Waterfall.png`.*

![Music Royalty ABS Cash Flow Waterfall](../4.%20Reference%20Charts%20(optional)/06%20-%20Music%20Royalty%20ABS%20Cash%20Flow%20Waterfall.png)

Underlying figures: [Google Sheet](https://docs.google.com/spreadsheets/d/1OjBIF3FLRyptRBy7GbJJOgPe2wEEgiMH/edit).

**Chart data:** The waterfall depicts the contractual payment priority that all cash flowing into the SPV must follow:

| Source | Description |
| :--- | :--- |
| Royalty collection sources | DSPs, PROs, MLC, SoundExchange, sub-publishers each remit to the SPV's collection accounts. |
| Collection account / lockbox | Indenture trustee receives all royalty receipts; sponsor and servicer cannot redirect. |
| Indenture trustee | Allocates cash per the priority of payments described below; performs all distributions. |

| # | Payment priority | Recipient |
| :--- | :--- | :--- |
| 1 | Senior fees & expenses (trustee, servicer, backup servicer, rating-agency fees, etc.) | Service providers |
| 2 | Class A interest | Class A noteholders |
| 3 | Class A principal (scheduled or, if past ARD, turbo) | Class A noteholders |
| 4 | Class B interest | Class B noteholders |
| 5 | Class B principal | Class B noteholders |
| 6 | Reserve account replenishment up to target | Reserve account |
| 7 | Residual cash flow | Issuer / equity holder |

---

**See also:** `03a - Financial Readiness.md` (deal economics around the structures above) · `03c - Legal Architecture.md` (how true sale, SPV construction, and account control agreements implement these mechanics) · `Glossary.md` for definitions of ARD, DSCR, OC, SPV, etc.
