Joff Wild

What could be one of the biggest-ever specifically IP-based transactions has recently been closed in China. According to the Conquering Innovation Fatigue blog, a trade publication called China Paper has reported that Quanlin Paper, a company based in the province of Shandong, secured a loan of RMB7.9 billion (approximately $1.3 billion) against a portfolio of trademark and patent rights.

Virna Chung, IAM’s research manager in our Hong Kong office, has put together a rough translation of the article which you can see at the bottom of this blog. China Development Bank led the consortium which made the money available and the loan was secured against a portfolio of 110 patents and 34 trademarks. The patents alone were valued at RMB 6 billion, or close to $1 billion.

If these reports are accurate, the amount that Quanlin has secured is among the largest known sums that an IP portfolio has directly generated in a transaction. Of course, most deals are not disclosed so we cannot know where it stands in the all-time hierarchy, but looking at recent transactions whose details have been made public we can say that Quanlin is right up there. Off the top of my head, I can think of the following in descending order in terms of size:

  1. Google buys Motorola Mobility for $12.4 billion in August 2011 and subsequently attributes $5.5 billion to the value of Moto’s patents.  

  2. The Nortel portfolio sold at auction to the Rockstar Bidco consortium for $4.5 billion in June 2011.

  3. Microsoft pays €1.65 ($2.3 billion) for a 10-year licence to Nokia’s patent portfolio, September 2013.  

  4. Alcatel-Lucent loan of $2.1 billion from Credit Suisse and Goldman Sachs secured against 29,000-strong patent portfolio in December 2012.

  5. Microsoft pays AOL $1.065 billion for portfolio of 1,100 patents and licences, April 2012.

  6. Facebook buys 650 patents from Microsoft, which Microsoft had previously acquired from AOL, for $550 million, April 2012.

  7. Consortium led by Intellectual Ventures and RPX pays $525 million to acquire portfolio of Kodak digital imaging patents, December 2012.

  8. Purchase of 882 Novell patents for $450 million by Microsoft-led consortium, November 2010.

  9. InterDigital sells 1,700 wireless technology patents and related rights to Intel for $375 million, June 2012.  

  10. Purchase of MIPs patent portfolio for $350 million by Bridge Crossing, November 2012.

Looking at that list the Quanlin Paper loan would slip in at number five, which tells you just how big it is in terms of the global IP market. It is also the only one which does not have a sizeable US quotient. The amount will have to be added to the RMB 63.8 billion ($10.38 billion) that Chinese companies have secured against their IP since the launch of a pilot scheme by the State IP Office in 2008.

As far as is known, most of Quanlin Paper’s IP rights are limited to China; thus, on the face of it, this deal looks like a huge vote of confidence in the country’s IP system, and in the value of the IP that is created and protected there. The IP will also be in an area that up until now has not attracted a huge amount of transactional interest – at least publicly. In the normal course of events, you would expect an IP-backed loan to be made when the lender believes it will be able to recoup at least a substantial portion of the sum from selling on or licensing the rights that it would inherit in the event of a default. Thus, there would have to be a high level of confidence in the strength, integrity and enforceability of the IP – in other words, it would have to be in a high-demand area and potentially read on a lot of other companies’ products and/or meet a need that many other companies have. Even then, you would expect a substantial discount to the true value of the IP to be applied.  

If you were at the IPBC in Singapore last November in the session on IP valuation, in which Alcatel’s head of IP Craig Thompson took part, you would have got a good idea about the level of IP education that Credit Suisse and Goldman Sachs needed about the Alcatel portfolio, as well as the detailed information they required about things such as existing licensing revenues and potential sales structures, before they OKed their $2.1 billion loan to the company. Thompson called it a painstaking and scary process, and one which necessitated a great deal of in-depth work from his team. And this was a deal done between a company with a long history of IP ownership and monetisation, with a huge amount of internal IP knowledge and expertise, and two of the world’s largest financial institutions.

Because we know only very few of the details about the Quanlin Paper IP loan, it is not possible to ascertain what degree of due diligence was carried out by the China Development Bank consortium before the deal was done. But in a country where the IP system itself is only relatively young, where the quality of the patents being granted can be pretty low and where the government itself has recognised the lack of IP expertise that exists, you do have to wonder about the metrics which were applied and the checks that were carried out.

That under 150 mainly Chinese patents and trademarks can secure so much money is mind-boggling. If China Development Bank and other financial institutions in the country have cracked a way of evaluating IP that gives them the confidence to release such sums we have to hope that at some time in the near future they are in a position to share their insights: they could provoke a financial revolution. Were they to internationalise, China Development Bank would no doubt have all manner of companies beating down their doors to get deals done.

More realistic, however, is the notion that actually the IP concerned probably isn’t worth close to the amount loaned and that if Quanlin Paper does default China Development Bank is going to struggle to recoup even a fraction of that RMB 7.9 billion if those patents and trademarks are really all that it ends up with. In the great scheme of things in China, though, as the government seeks to inculcate a culture of strategic IP value creation that may not be too much of an issue; the state-owned China Development Bank can afford to take the hit and, in any case, a company like Quanlin Paper is very unlikely to fail to pay what it owes.       

A rough translation of the China Paper story:

"I didn't believe that intellectual property could play such a big role in this loan transaction and account for such a large proportion of it!" said Li Hongfa, chairman and general manager of Tralin Paper Co. The RMB 7.9 billion syndicated loan has begun to pay this week. This fund is a great help to those enterprises that are fast-expanding and want to seize market opportunities but tight on capital.

Tralin company got the loan with 110 patents and 34 registered trademark as the mortgage. The loan was recorded at SIPO on 21 Feb. According to verification from the provincial Intellectual Property office, this is so far the largest domestic intellectual property mortgage loan financing.

"The project can accelerate once the money is in place. Market opportunities do not wait!" The project that Li talked about is a pulp and paper annual processing capacity of 1.5 million tons of straw comprehensive utilization project. Tralin company headquarters is located in Gaotang County, Liaocheng City. It is a large enterprise with the pulp and paper industry its core business. The use of straw manufacturing "ecru" paper products to make environmentally friendly products have revised people's impression of the paper industry and is changing their consumption habits. After the company had introduced the project, it got the approval from the Environmental Protection department and the national development and Reform Commission quickly. It is a demonstration project for the comprehensive utilization of national resources and circular economy and the key provincial construction project in 2013. The project construction is now in full swing, built and is planned to finish by the end of the year. The estimated annual sales income is ~RMB 82 billion, sales tax RMB 0.49 billion and making a profit of RMB 12.4 billion.

Intellectual property rights are highly recognized by the capital market and are a great benefit to science and tech enterprises. The development of Tralin company itself has benefited from its continuous investment in intellectual property and the core technology. Even in the most difficult of times, the company has never given up on investing in these. However, Li Hongfa this time was deeply touched because the patents that the company owns were valued at RMB 6 billion and played a key role in helping the company to get the loan. This means that patents and other intellectual property rights not only can monopolize the market and create long-term profits for the enterprise, they can also "bring money" when used as a mortgage and can really help science and tech companies to solve the hardest problem of capital shortage in their development. Thus, companies can fully realize their growth potential, grasp market opportunities and grow.

This financing has also generated more interests in banks towards the science and technology enterprises. Not only did China Development Bank lead the consortium, granting the RMB 7.9 billion loan to Tralin, Bank of Communications even signed a special strategic cooperation documents with the Provincial Science and Technology Department and launched a special intellectual property financing product. General manager of Shandong branch of Bank of Communications retail credit department Jiang Lurong said, intellectual property seems intangible, but it reflects the ability of value creation and sustainable operation of enterprises. Banking risk is not increased, but may be able to get a hold of high-quality customers early and improve the structure/make up of the client base, just like Tralin.