Feasibility Analysis of Patent Backed Securitization

Asset securitization has been a new financing method since the 1970s. The characteristic that differentiates asset securitization from traditional types of financing is that the future repayment of principal and interest comes from expected cash flow generated from specific assets, instead of depending on the borrower’s overall profitability. Patent backed securitization is the process of acquiring funds ahead of time in the means of issuing securities to investors. The collateral for the securities themselves involved the right to future cash flow from the patents, i.e. patent licensing royalties. Yale University securitized its future patent royalty stream on a anti-HIV drug Zerit in year 2000, which is the first case of patent backed securitization. It promises a new era in the asset securitization market.
This thesis first reviews several patent valuation techniques frequently used in practice and factors that influence patent royalties as well. Next three basic concepts of packaging patents as asset backed securities are introduced, which is securitization of patent backed loans, securitization of patents with existing licensing agreements and securitization of non-licensed patent rights. The author then analyzes the risk and gives advice in accordance with different product life cycle patterns of industries. Furthermore two potential ways of credit enhancement are mentioned. The case of Yale is also included ultimately.
Because of approval of the Financial Asset Securitization Law in June 2002, some transactions were already been launched since then. It is hoped that the securitization techniques and skills will make progress gradually. Patent backed securitization is a new funding tool for inventors to unlock their patent value, provided that there is more matching legislation and mechanism. For example, patent valuation systems, patent exchange markets and credit guarantee funds. As a result, patent inventors can acquire a new mean of financing. Eventually the goal of enhancing industry competitiveness is reached.