Corporate patent portfolio values reveal the likelihood of the corporates’ survival.
New study opens up lucrative opportunities for high yield - low risk corporate bonds by monitoring the corporates patent portfolio.
Various factors play a role in determining a company's creditworthiness, including its size (market capitalization). Increasingly, however, a company's innovative strength is also to be given greater consideration. The main problem for innovative companies is the greater information asymmetry, as innovation is difficult to represent. The simple number of patent applications is not a sufficient indicator: patent application activity only represents the cost side of patents. But patents are assets, therefore it is needed to determine and monitor their values. Correspondingly, a company's patent portfolio value plays a key role here as a blueprint for innovation efforts.
A new study examines the default rates of publicly traded companies over a 10-year period and finds that companies with valuable patent portfolios have a much better chance of survival. The results show that the smaller a company is, the more important valuable patents are, and that default risk can be significantly reduced by monitoring the value of a company's patent portfolio over a 10-year period, even when the total value of the patent portfolio is comparatively low at 8 mUSD.
When it comes to corporate bonds, this observation is really crucial: Interest rates are usually determined on the basis of a company's rating. In the case of ratings, the size of the company plays an important role. As the study shows, small companies generally have a much higher probability of default (2.9%) than medium (0.6%) and large (0.2%) companies. This default risk is therefore reflected in their higher interest rate. These are typically found as high-risk, high-yield bonds. However, if only companies with high-quality patent portfolios are included in the group of high-yield bonds, the default risk can be significantly reduced, as has been demonstrated in the study. The default rate can be reduced by monitoring the value of a company's patent portfolio: As long as it doesn't fall below the original threshold, the probability of default is almost negligible. This could form the basis of a product that takes into account high-yield bonds with significantly reduced risk, providing investors with a profitable low-risk fixed-income product.