Creating Liquidity From Art During Challenging Times

Mari-Claudia Jiménez: You run Sotheby’s Financial Services (SFS), the art lending arm of Sotheby’s. What are some of the recent requests you have been hearing from clients?

Madeline Lissner: Since mid-March, we have been seeing over a tenfold increase in financing requests, from both existing and new clients. It has been particularly interesting to note the different reasons behind potential clients’ use of their art for liquidity at this time – and not all are the reasons you would usually expect in a volatile economic market.

MCJ: What are some of these reasons?

ML: One may expect that clients are using art or jewelry as collateral because they need immediate liquidity as a result of an economic downturn, but, at this moment, we have seen a variety of different motivations. Some clients have expressed that there may be attractive purchasing opportunities emerging across asset classes for which they want to have funds ready to put to use. By borrowing against their collection, they can access dry powder when opportunities arise and they will be able to act quickly. There are other clients looking to access the credit markets now, while they can, given possible future uncertainty. Another major reason relates to individuals who either have strict liquidity deadlines, like estate taxes, or were expecting to receive specific cashflows from the sale of estate assets or from their businesses by a certain date, but such cashflows have since become delayed.

MCJ: Many of the clients of our Fiduciary Client Group are estates selling all or part of their collections to meet estate tax obligations. How have they been using loans?

ML: SFS regularly works with the Sotheby’s Fiduciary Client team to provide short-term consignor advances against upcoming sales of an estate’s property, as well as free-standing loans using an estate’s art, jewelry, or collectibles as collateral. As estates are frequently selling to meet specific deadlines, an advance is a useful tool if the timelines do not align perfectly with the scheduled auction of the estate’s collection. Advances and loans are particularly useful at this time when fiduciaries are sensitive about selling into an uncertain market. While Sotheby’s has been having record levels of online auctions over the last two months and has been achieving unprecedented results, there have been other live auctions that have been postponed due to the evolving global COVID-19 situation. Therefore, estates have been assessing how to still meet deadlines. A consignor advance against property to be sold at a later date is one straight-forward option.

MCJ: What are the typical requirements for an advance or loan using art as collateral? What is the typical loan-to-value ratio available to borrowers? Are there any special considerations or requirements for estates or fiduciaries?

ML: When beginning the underwriting process with a new borrower or increasing a loan with an existing borrower, SFS will focus on understanding the underlying collateral. Loans, including advances against consignments, will typically have a loan-to-value ratio (LTV) from 40% to 60%, depending on the collateral. The LTV may vary based on the price points of the items, the diversity of the collateral, potential blockage if all items need to be sold, and the depth of the underlying market for the collateral pieces. As SFS is the world’s only full-service art financing company, SFS has access to the Sotheby’s team of international specialists across the globe, thereby creating a swift collateral valuation process done entirely in house.

For any borrower, we will always ask for updated organizational documents and IDs. If the borrower is a trust or estate, we will have additional requests related to the trust agreement or certification of trust provided by the attorney for the trust. For estates, the documentation will depend on whether there is a will or not, as well as where the estate has been set up.

MCJ: Is there any takeaway from prior economic downturns?

ML: While the correlation between art and U.S. equities is low, the art market typically feels a lagged effect after the stock market. For example, after the 2008 / 2009 recession, we saw the art market decline about 20% in 2009 from the prior year. This is based on repeat sale indices from the Sotheby’s Mei Moses database. But directly after this contraction, the art market returned, and the Contemporary art index notably accelerated at the fastest rate of the art collecting categories.

MCJ: How can clients think of this in relation to the current climate?

ML: While auction houses and galleries have found new ways to sell art online, there are not yet comprehensive art market data points signaling a shift in any direction. As of May 18, Sotheby’s has been the only global auction house to successfully sell an artwork or item of jewelry for over $1m at auction since the shutdown in the U.S. in mid-March. Sotheby’s sold five such works – a Cartier bracelet, and paintings by George Condo, Brice Marden, Christopher Wool, and Giorgio Morandi. Many of our potential borrowers recognize that there are other ways to access cash at this time, in addition to selling, and see the advantage of a 1 to 2 year loan for their art, jewelry, or other collectibles that may continue to appreciate in value.

MCJ: What should new borrowers be thinking about when taking out a loan?

ML: It’s important for any borrower to consider their priorities — for both their art and their cash flow. For example, some borrowers may desire maximum flexibility as to the location and movement of their collection, but that may then entail adjustments to the LTV ratio or the fee structure. There may also be trade-offs between speed of execution and interest rates. SFS will regularly process a new loan faster than a traditional bank lender because our borrowers are usually well known to Sotheby’s, the collateral items often have been appraised by Sotheby’s specialists previously, and SFS maintains a focused underwriting process.

MCJ: What are key questions that someone should ask when applying for a new loan?

ML: There are two key areas that I find most overlooked: hidden fees and valuation frequency. On the fee point, clients will often focus on the quoted interest rate, but it’s also important to understand who is paying legal fees to produce contracts, for example, and if there are additional charges each time a new amendment has to be papered. These costs can start adding up if your lender works with an outside law firm, rather than in-house.

For valuation frequency, it’s important to understand how often the items of collateral are valued and when the lender performs a LTV test that may require the borrower to post additional collateral or provide a cash repayment. No borrower should be caught surprised by an unexpected margin call.