“In the future, everyone will be world-famous for 15 minutes,” is a world-famous quote that Andy Warhol probably never said .
If people also enjoyed imagining that the 20th century’s foremost screen-printer of soup cans was equally prescient about financial markets, they might misattribute this statement to him too: “In the future, everything will be securitised for roughly three years.”
That’s because the works of contemporary artists such as Warhol and Jean-Michel Basquiat could now become collateral for half a billion dollars of asset-backed securities, alongside paintings by old masters including Rembrandt.
Sotheby’s is looking to borrow $500mn for three years* against a pool of loans it provides to filthy rich art collectors, through a new securitisation vehicle the auction house has dubbed ArtFi.
For connoisseurs of the unique form of abstract art that adorns modern-day bond prospectuses, here’s the structure diagram:
Writing margin loans against paintings is not a particularly new business line for the auction house. The deal’s prospectus notes that Sotheby’s Financial was founded back in 1988 to enable “its clients worldwide to unlock liquidity in fine art, luxury items, and other collectibles through financing solutions and innovation”.
But anyone surprised that a venerable auction house, which traces its history back to 18th century England, is now taking the financialisation one step further by securitising those loans, clearly doesn’t know much about Sotheby’s present owner.
The buccaneering Franco-Israeli telecoms billionaire Patrick Drahi took Sotheby’s equity private five-years ago. And while Drahi may like to think of himself as a shrewd operator when it comes to wringing costs out of mobile and cable businesses, he is better known for his prowess at financial engineering.
His buyout of Sotheby’s was funded with billions of dollars in loans that were initially also secured on shares in key companies in his Altice telecoms empire (he then re-negotiated the terms to have this security released, a shrewd decision given the market turmoil now surrounding Altice after Drahi’s longtime lieutenant was swept up in a Portuguese corruption probe ).
After taking the keys to the auction house, Drahi then layered on hundreds of millions of dollars more debt by mortgaging off Sotheby’s trophy properties in London and New York.
The move to raise $500m in art-backed securities comes at a moment of deep distrust of Drahi in the bond market, however.
The management of Altice’s heavily indebted French telecoms business badly burned bondholders last month , when they carefully explained on a results call that, because modern-day debt covenants have more holes than Swiss cheese, the company could keep hold of billions of dollars from recent asset sales without giving lenders a dime. If this wasn’t provocative enough, bondholders were then told that they should brace themselves for haircuts.
Sotheby’s will be banking on the fact that there isn’t much overlap between the buyers of esoteric ABS issues and European junk bonds, with investors in the former tending to be more focused on the underlying collateral rather than the deal originator’s ultimate owner.
And in recent years, the securitisation market has become a welcoming home to deals backed by everything from music rights to software companies’ private credit loans .
This isn’t even the first time that loans to the ultra-rich backed by their trinkets have been fed into the ABS machine. Just over two years ago, Credit Suisse broke new ground with a so-called synthetic securitisation of a portfolio of loans tied to the yachts and private jets of oligarchs and billionaires.
Sotheby’s debut ABS deal is a slicker operation than another example art securitisation FT Alphaville wrote about last month. Investment bankers from the likes of Barclays, BNP Paribas and Morgan Stanley are shepherding the deal through the market, while Canadian ratings agency DBRS has provisionally awarded the top tranche of the proposed ArtFi deal a pristine AAA credit rating.
Anyone who thought that diversification was the key to unlocking top-tier ABS ratings may be surprised to learn that loans to just five collectors make up nearly half of the $1.4bn portfolio underpinning the deal:
DBRS’s pre-sale report includes several handy pie charts breaking down the type of artwork backing these loans:
The vast majority of the artwork backing the loans is also held in storage facilities managed by Sotheby’s or approved third-parties:
Sotheby’s only allows borrowers to hang their artwork in private residences located in “the U.S., Canada excluding Quebec, England, and Wales” (FTAV is not sure why French Canadians are judged less trustworthy than their Anglophone compatriots; polite answers only in the comment box).
DBRS’s report also contains this wonderful description of Sotheby’s Financial Services’ collection strategy if any deadbeat art collectors fall behind on their payments:
SFS employs a strategy for collections on delinquent loans that utilizes outbound phone calls, email notifications, reservation of rights letters, and other collections techniques, including legal action (which may entail in‐house counsel or outside counsel proceeding with foreclosing on the collateral and/or commencing litigation or similar legal actions). SFS uses escalating stages of collections activity during the period of non‐payment to enforce its rights.
ArtFi 2024-1’s prospectus has further detail on the collateral backing the deal, which it notes can include “fine art, collectibles, design furniture, coins, books, jewelry, watches, wine or other spirits” that Sotheby’s would put under the hammer at its auction houses around the world.
Anyone concerned that dubiously dated pickled sharks might loom large in the collateral pool can breathe a sigh of relief: Damien Hirst is not listed among the top five artists in the collateral pool.
As you can imagine, the prospectus’s risk factors make for entertaining reading, including stark warnings that art valuation is “inherently subjective” and that Sotheby’s can never “entirely eliminate” risks such as “falisification of the artist’s signature”.
The prospectus is careful to note that Sotheby’s lending arm did not get swept up in the recent boom and bust in digital artwork, however:
SFS does not originate loans secured by a non-fungible token or other similar digital artwork that does not exist in tangible form
It seems that there is one form of collateral that is beyond the pale of today’s permissive securitisation market: monkey JPEGs.
*While ArtFi 2024-1 has a “series scheduled maturity date” set at the end of 2031, its prospectus explains that the final repayment date is “expected to be earlier” than this (and “could be significantly earlier”), setting out a “Final Scheduled Principal Payment Date” in March 2027