Doesn't this whole thing read like Fastow's shells at Enron? ----- Original Message ----- From: "Michael Perelman" <[EMAIL PROTECTED]> To: <PEN-L@SUS.CSUCHICO.EDU> Sent: Monday, May 07, 2007 12:24 AM Subject: [PEN-L] Private Equity, Intellectual Property, Tax Manipulation
> Private equity supposedly companies make their fortune with their deep > insight into unlocking hidden value. In the case of Sears, this value > is taking trademarks, shifting them abroad to tax havens, and then > reducing taxes. Somehow, we should applaud this great feat of > capitalist brilliance. Here is the story. > > Berner, Robert. 2007. "The New Alchemy At Sears." Business Week (16 > April): pp. 58-60. > 58: "BusinessWeek has learned that Sears has created $1.8 billion > worth of securities based on the brand names Kenmore, Craftsman, and > DieHard. In essence, it has transferred ownership of the brands to > another entity, which it then pays for the right to use the brands. > The deal, carried off last May, was the biggest "securitization" of > intellectual property in history, according to Eric Hedman, an analyst > at Standard & Poor's, which, like BusinessWeek, is a unit of The > McGraw-Hill Companies. The story hasn't gotten out until now because > the bonds haven't actually changed hands -- Sears is holding them in > its Bermuda-based insurance subsidiary -- and because Sears has never > disclosed them, nor has it had to do so. But that could change if > Sears were to decide to sell them to outside investors and collect the > cash." > 58: "Don Davis, managing director and general counsel at Commercial > Strategy, a Boston intellectual property consulting firm, says the > potential for a market in bonds backed by intangible assets could be > even bigger than the market for junk bonds, given that 70% to 80% of > the total value of the stock market rests on intangibles such as > intellectual property. "The scale is astounding," he says." > 58: "The journey to figure out what's going on inside Sears' inner > sanctum starts with some footnotes buried deep in financial filings. > Sears has disclosed that it has created a "separate, wholly owned, > bankruptcy-remote subsidiary" -- essentially a company within a > company. Called KCD IP (for Kenmore Craftsman DieHard intellectual > property), the entity has issued $1.8 billion worth of bonds backed by > the intellectual property of Sears' three biggest brands, according to > filings with the Patent & Trademark Office." > 58: "Sears has, in essence, created licensing income from whole cloth. > First it transferred ownership of the brand names into KCD. Now, KCD > charges Sears royalty fees to license those brands and uses the > royalties to pay the interest on the bonds. It has sold the bonds to > the insurance subsidiary, where, like any other security on an > insurer's books, it serves as protection against future loss. The > insurer, meanwhile, protects Sears from financial trouble -- and > because it's a subsidiary, it does so at a lower cost than Sears could > get from an outside party. If you're confused, that's because it's all > circular: The payments net out to zero because Sears owns every piece. > But that would change if Sears were to sell the bonds to outsiders. > Then voila Sears would be holding up to $1.8 billion in cash, and > investors would be holding the bonds." > 59: "The KCD bonds have a higher credit rating than Sears' regular > bonds. Moody's Investors Service has given KCD an investment-grade > rating of Baa2, four rungs better than Sears' junk rating of Ba1. How > so? If Sears were to go bankrupt, regular bondholders wouldn't be able > to get their hands on the Kenmore, Craftsman, and DieHard trademarks, > the company's crown jewels. They would go instead to the insurer." > -- > Michael Perelman > Economics Department > California State University > Chico, CA 95929 > > Tel. 530-898-5321 > E-Mail michael at ecst.csuchico.edu > michaelperelman.wordpress.com >
