Eddie Lampert Creates a New Type of Security


When I was in business school, one of my professors told me that Coca-Cola was the most recognized brand in the world and, as such, could lose all their physical assets and still take out a $1 billion loan against the trademark. Tapping into the value of intangible assets can be difficult, but Eddie Lampert may have shown us what the future holds.

According to a recent Businessweek article, Lampert has securitized the intellectual property of Sears. The transactions related to the deal have all been internal, but that may change down the road. Here's more about the deal.

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.

Such daring shouldn't come as a surprise at a Lampert-run shop. When he looks at a company, he sees value hidden from plain view-value that traditional accounting methods often miss. That keen eye is what prompted him to buy up a majority of Kmart's bonds at a deep discount after it filed for bankruptcy protection in 2002. He saw that Kmart's real estate was deeply undervalued by creditors, and figured that would protect his investment. He was right.

Now, Sears could be on the cusp of turning a much squishier asset, intellectual property, into actual cash. 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.

This holds some fascinating implications for the future of business.