Securitising patents in the global credit crunch

Securitising patents in Japan
The new Trust Law

Amid the global turmoil created by the subprime loan crisis, investigators tend to be cautious about securitisation transactions. Theoretically, however, securitisation is still a useful tool for getting assets to the market and for manipulating risks for individual investors. These essential aspects will not change because of the current crisis, therefore it is likely that so-called ‘simple’(1) securitisation transactions will still be used by investors who take a long-term view. This includes securitisation of patents.

Securitising patents in Japan
To date there has been only one patent securitisation transaction in Japan. However, examining this reveals valuable pointers for future transactions.

In this case, a special purpose corporation (TMK) was established under the Law Relating to the Securitisation of Assets (Law 105/1998). This TMK raised over ¥200 million by issuing securitised paper (ie, specified bonds, common shares and several types of preferred share)(2); it then bought four sleeping patents related to optics from Scalar Corporation for approximately ¥182 million.

The TMK established exclusive licences with Pinchange Co, Ltd (a subsidiary of Matsushita Electric Industrial Co, Ltd) and accordingly earned licence fees.

When utilising a TMK as a vehicle for securitised patents, it is essential to evaluate the patents pursuant to the Law Relating to the Securitisation of Assets. In Japan, lawyers, patent attorneys and other professionals usually evaluate patents by utilising corporate finance theories (eg, discount cash flow, real option or the Monte Carlo method). In this case, VentureLabo Inc and PLX (currently, SBI Intechstra Inc) evaluated the four patents using various corporate finance theories (including discount cash flow, real option, Black-Scholes and the Monte Carlo method). According to their evaluation, the patents were worth between ¥154 million and ¥266 million.

Pinchange Co, Ltd, which was not a TMK or a bankruptcy-remote entity, was liquidated about three years ago.

The new Trust Law
A new Trust Law (Law 108/2006) has recently been enacted in Japan. It is now possible to securitise patents using this law rather than the Law Relating to the Securitisation of Assets. If a trustee is made responsible for issuing the securitised paper(3) (rather than a TMK), then the risks and tax benefit of the securitisation will be slightly different. In addition, investors will hold risk-manipulated beneficial interests related to the trustee instead of bonds or shares. Moreover, entrusted patents themselves will be separated from the bankrupt risk of an originator and/or a trustee.

Although there are still hurdles to be crossed (4), there is much optimism that securitisation transactions with innovative structures, using the new Trust Law, could become more common in future.

Endnotes
(1) There are many so-called ‘complex’ securitisation structures, such as securitisation structures that rely on credit default swaps.
(2) The TMK issued patent-backed securities for ¥154 million for 5 years at 2%. The specified bonds were underwritten by Sumitomo Mitsui Banking Corporation. Moreover, the TMK issued (i) preferred shares of ¥50 million for ITOUCHU Corporation and (ii) preferred shares of ¥1 million for Pinchange Co, Ltd. Japan Digital Contents acquired the common shares. Using this securitisation structure, investors were able to invest in securitised paper that was separated from the original patent holder’s (ie, Scalar Corporation) bankruptcy risk.
(3) In the United States, for instance, Yale University entrusted BioPharma Trust with its d4T patent in order for the latter to securitise it.
(4) For example, in order to maintain the bankruptcy remoteness of entrusted patents, trustees have to waive their rights to file petitions for bankruptcy against trust property, including entrusted patents. However, in Japan it is not always easy for trustees to waive such rights as a result of a rigid and severe fiduciary duty arising from Japanese Trust Business Law (Law 154/ 2004).