Sotheby’s, the auction house under pressure from activist investors to boost profit, doubled the amount it can borrow to make art loans in a bid to win clients and top consignments.
Sotheby’s secured a credit line of more than $1 billion to make such loans from a consortium including General Electric Capital Corp., according to a filing last week. The New York- based auction house previously could borrow as much as $550 million under that line.
More wealthy collectors and investors are taking advantage of rising art prices by borrowing against their trophy works. Banks including Goldman Sachs Group Inc. and Citigroup Inc., hedge funds and specialist lenders offer such services but Sotheby’s has an edge because it can also auction the works for clients.
“Sotheby’s financial services is another area where we can expand and grow profitably through improved focus and attention,” Tad Smith, Sotheby’s chief executive officer, said in a conference call with investors on May 11.
Smith, a media and entertainment executive who replaced William Ruprecht as CEO this year amid pressure from billionaire activist investor Daniel Loeb, is looking for ways to increase earnings amid record prices for art.
Revenue for the finance segment, a small but fast-growing business for Sotheby’s, increased 79 percent to $15.9 million in the first quarter from the same period a year earlier. Profit surged 41 percent to $4.3 million.
Higher Revenue
Sotheby’s revenue from its agency segment, which includes auction commissions, rose 4 percent to $127.9 million. In May, Sotheby’s sold $890 million of art during two weeks of big auctions in New York. Christie’s tally from the equivalent sales was $1.7 billion.
A syndicate of lenders led by GE Capital is backing the credit. Sotheby’s credit line to finance art-backed loans to clients rose from $550 million in August, the company said in a June 15 filing, an increase of 88 percent. Sotheby’s paid about $2.7 million in fees to amend the agreement.
The auction house has been a GE Capital customer since 2009, when its credit facility was $200 million, according to filings.
Sotheby’s secured loan portfolio totaled $700 million during the first quarter, up 53 percent from the year-earlier period. The company has used a mix of debt and cash to finance the secured loans, returning 11 percent on equity during the 12 months ended March 31, according to the filing.
Record Balances
Until 2014, Sotheby’s used its cash flow to primarily finance loans on art. Since then it has set up a separate capital structure using borrowed funds.
“The increased borrowings under our credit facility are driven by the record level of loan portfolio balances,” Jan Prasens, managing director of Sotheby’s Financial Services, said in phone interview. “Art lending is a growing business for Sotheby’s.”
According to 2014 report by Deloitte/ArtTactic, 48 percent of 90 major art collectors surveyed said they would be interested in using their art collection as collateral for a loan, up from 41 percent in 2012.
Christie’s, a private company owned by billionaire Francois Pinault, reports sales twice a year but not profit. Sotheby’s position as a publicly traded company has been “long considered a strategic disadvantage” because its missteps are reported, Skate’s, a New York-based art market researcher, said in a report.
“This can also be a strategic advantage as far as access to low cost capital is concerned,” according to the report.
