By Jack Ellis
May 21 2012
Last week WTR reported Ford’s new marketing campaign, which eschewed using the company’s renowned blue oval trademark. Despite this bold move, the trademark remains one of Ford’s most valuable assets - so valuable, in fact, that it was used as collateral to secure a loan in 2006. As Ford now looks to reclaim its iconic logo from lenders, this example of brand mortgaging imparts some valuable lessons for those considering a similar tactic.
After several years of unprofitability, Ford announced a restructuring plan in 2006. As part of that plan, the company mortgaged its assets – including intellectual property – to raise a loan in the region of $23 billion to implement the restructuring process. Like other US car manufacturers Ford was hit hard by the economic crisis that began in 2008 but the company was the only one of Detroit’s Big Three to avoid filing for bankruptcy. By that point, Ford had already made moves to address the sustainability of its business – and the fact that it avoided Chapter 11 is thanks in no small part to the value of its brand.
In its Global 500 2012 report on the world’s most valuable brands, Brand Finance valued the Ford brand – including trademarks and associated goodwill – at $18 billion. “Judging by the size of the secured restructuring loan it is apparent that both Ford and its lenders had a clear understanding of the high levels of equity and value in the brand,” reflects Bryn Anderson, valuation director at Brand Finance. “Ford would have used a number of tangibles and intangibles as collateral, but it is evident that its brand is a hugely valuable asset and one it was able to leverage in order to secure the loan.”
In its 2006 financial report (which can be found here, with a breakdown of collateral for the loan on p76) Ford states that the ‘eligible value’ for collateral was $41.6 billion, of which $7.9 billion – the second largest share – was accounted for by ‘intellectual property and US trademarks’. This then translated into a borrowing base of $22.3 billion, of which $2.5 billion was allocated to ‘intellectual property and US trademarks’. According to the report, these trademark valuations were based on the findings of a third party. If the eventual breakdown of collateral reflected these values, then a very significant portion of the loan was secured against Ford’s trademarks.
For those looking to follow Ford’s example, there are a number of considerations before securitising one’s IP rights. While the practice of using trademarks as collateral for loans is not uncommon, Keith Medansky, partner at DLA Piper, reiterates that IP will only make up a part of the securitised assets a bank considers: “A lender is going to make a judgement on the overall mix of collateral. If they are satisfied that the mix they have is sufficient, then they’ll proceed. They are looking at an overall business and all of its assets, and trademarks are just one component.”
The majority of such loan agreements will allow the creditor to retain legal ownership of the trademark. Medansky explains that in the US, this will require notification of the securitisation of the trademark with the relevant authorities. “It is possible to file those interests both with state authorities and with the USPTO, and a number of cases have created some doubt over where is best to record. Rather than trying to parse this and be technical, many do it in both to avoid having to make the value judgement and risk being unprotected.”
However, in some instances the lender may prefer to take outright ownership of the trademarks and license them back to the borrower. Medansky explains: “In such instances, if the borrower defaults, the lender will already own the trademark and is in a sense more protected than if they had to foreclose it.” But the approach of assigning marks to the lender and licensing them back comes with its own added complexities: “In that instance the lender is essentially a licensor, and all the formalities one needs to observe in a proper license would need to be followed.” Medansky explains that enforcement efforts can also be complicated by this approach: “If the borrower then needs to go after an infringer, it will need to get the lender involved to participate in the case as a plaintiff.”
While Medansky notes that the practice is more widespread than is generally reported, Anderson argues that the true value of a company’s intangible assets still remains poorly understood and underappreciated: “Many companies could be in a position to leverage their brand more effectively. That said, in most cases internally generated brands cannot be recognised on a company’s balance sheet - only acquired brands can be accounted for.”
Ford was able to leverage its brand to help fund a profound restructuring of its business. But many – perhaps, most – companies will not have anywhere near an accurate valuation of their trademarks, reputation and other intangibles that underpin their brand. This situation needs to change. As the example of Ford’s ‘brand mortgage’ demonstrates, the ability to put a value on brand could turn a business round – and even help save it from insolvency.
You need to be logged in to leave comments. Click here to login.
There are no comments on this article