Royalty finance is a form of revenue-based debt finance. It could also be considered a type of hybrid financing and is similar in some respects to a corporate mortgage in that the debt is usually structured over a repayment term of 25 to 40 years.
However, the key difference with royalty finance is that an element of the contractual income due to the lender is linked to a percentage of the borrowers’ revenue.
The concept of royalty finance is much more prevalent in north America, in particular within the mining and pharmaceuticals industries, and is estimated to represent a £50 billion sector.
In the UK, AIM listed company, Duke Royalty is believed to be the first player to enter this area of financing in Europe.
Case studies: Royalty finance
To illustrate the commercial concept of the royalty finance business model: in August 2018, Duke entered into a £10 million royalty financing agreement with a Canadian-based healthcare company (InterHealth Canada Holding Corp). The investment took the form of a secured loan.
In return, Duke would receive a year 1 annual distribution of £1.35 million (the company typically targets yields of 12 to 15% in the first year) and from the second year onward, the monthly distribution is linked to an annual revenue-based adjustment (subject to an agreed collar of 6% per year of the total increase or decrease in revenue compared to the previous year).
In this example, the financing is to run for a period of 30 years, with a borrower buy-back option from year 5 onwards.
Another example of an AIM listed company which recently entered the royalty financing sector is Trident Royalties Plc (LSE:TRR). Its principal activity is to acquire or underwrite cash generative revenue royalties and income streams from established, producing mining companies. Income is typically generated from a percentage of turnover from the production of commodities (base and precious metals).
TRR’s first deal in this space was carried out in March 2020 when it agreed to pay A$ 7 million for a 1.5% revenue royalty from an Iron Ore Operation in Western Australia. It is expected that over time, the operator of the mine (which has an established producing track record), intends to increase production and this will eventually generate higher income and cashflows in respect of the royalty.
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