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So, this turned out well then

Telegraph, today:

But the lawsuit is the latest setback for Hipgnosis, which has come under scrutiny for the way it values its song catalogue amid rising interest rates and in November was forced to secure a new $700m revolving credit facility after maxing out its previous $600m debt package.

The company’s market value has plunged to below £1bn – less than half the £2.2bn price tag it places on its portfolio – leaving it unable to buy any more songs.

Rising interest rates damage – even if not quite destroy – the Hipgnosis offering.

Here’s Worstall in Jan 2021.

The reason being that I don’t see much, if any, capital appreciation over time in the values of those songbooks. Quite the opposite in fact, they’re a depreciating asset. That’s fine, there’s still that margin to be made from the different time horizons of the parties involved. Songwriters in their 60s have a different time value of money from investors putting money in now to invest for the next 20 or 30 years. That’s what the economic – as opposed to business – play really is here.

But the flip side of that is that the income from Hipgnosis is going to remain at about what it is. Currently, the yield is around 4%, which is perfectly acceptable in today’s market. But while that is inflation protected – to a degree, royalties will rise with inflation, even if with a lag – it’s not going to rise if interest rates in general rise. That is, the real valuation of Hipgnosis here is as with an inflation protected bond.

My supposition is that the general interest rate environment is going to rise in the coming years. Certainly, we’re at the end of the long bull market for bonds. I would insist that QE and money printing are going to lead – over an indeterminate horizon – to a rise in the real interest rate. Exactly the thing which Hipgnosis leaves us exposed to. It offers protection against a rise in nominal rates, but not real.

Further, because it’s equity, it will price like a perpetual bond. That means, the capital loss from a rise in interest rates will be greater than would happen to a time limited bond of the same interest rate/risk profile.

It’s locking in a yield when I expect interest rates to be rising. That doesn’t sound like a clever deal to me.

Ho well.

3 thoughts on “So, this turned out well then”

  1. How silly can you be, Tim?
    Just because facts fit what you forsaw, that’s pretty much irrelevant.
    Ole fuddy-duddies like us need to adapt to the 21st century. What are the feelz? What do the high-melanin content persons think? That’s what counts chum!

  2. I remember reading that, so well done Tim..Murphy on the other hand was recommending long dated gilts yielding 1% because they were “secure”..I wrote on his blog about duration risk in a rising interest rate environment and you were locking into a negative real yield. I was dismissed out of hand because 1) so much pension money is invested in and how could they be wrong 2) inflation will never be a problem and rates won’t ever go up…fukcing idiot, the same “secure” gilts are down between 30%-50% depending on maturity.

  3. “[Hypgnosis] offers protection against a rise in nominal rates, but not real.”

    Jan 2021: Interest rate: 0.1%; Inflation: 0.7% => real interest rate -0.6%
    May 2023: Interest rate: 4.5%; Inflation: 8.7% => real interest rate -4.2%

    i.e. nominal interest rates have risen and real interest rates have fallen since the 2021 piece was written.

    So the decline of Hypgnosis doesn’t seem to be related very directly either to its ability to protect against a rise in nominal rates (its value has fallen as nominal rates have risen) or to its failure to protect against a rise in real interest rate (its value has fallen even as real rates have fallen).

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