How Securitization and Art-Backed Debt Offerings Present New Ways to Invest in the Art Market

CEO of Athena Art Finance, Rebecca Fine, speaks to art market journalist Riah Pryor about the latest developments in the financialization of art

Since we last spoke, Sotheby’s announced a securitization backed by its art loan portfolio. How does it work and how is it ‘new’?

This is the first securitization of an art loan portfolio, and it is the first time a credit rating agency has rated such a product. Securitization is a way for companies to find new sources of funding and to move assets off their balance sheet (much sooner than waiting for the underlying loans to be repaid). Through a complicated process, involving many parties, a pool of loans is converted into a tradable security, which is divided into tranches of interest-bearing securities with different risk-return properties and different yields. The least risky tranche has the first rights to the income generated by the underlying loans, and the riskiest tranche has the last claim on that income. Bear in mind, Sotheby’s Financial Services’ product is only available to institutional investors at this point.

Rebecca Fine, CEO, Athena Art Finance

What is the significance of all of this for the market more broadly, and what can we expect to happen next?

The concept of using art as collateral for a loan is not itself new: several private banks, auction houses and specialty finance companies (including Athena Art Finance) have offered lending programs for many decades. But the private banks and auction houses aren’t really making pure-play art finance loans (auction houses are trying to drive consignments and banks are lending against their clients’ financial portfolios, not their art collections). And regardless of who makes the loans, for the companies that fund the loans, the loans are not very liquid (because lenders have to wait for the borrowers to repay the debt).

However, when art loans receive a rating from a rating agency, such as the case with the Sotheby Financial Services’ securitization, they are deemed suitable investments for institutional investors, like pension funds, endowments, insurance companies, which invest in institutional private debt deals. Dividing the portfolio into tranches, each of which has a different level of risk associated with it, enables investors to buy at different prices. And those tradable securities are much more liquid than the original loans were on Sotheby’s balance sheet.

Do you see the increasing breadth of art-debt investment offerings as a sign that demand is on the rise?

Yes, this art-adjacent securitization is attracting a lot of attention outside of the artworld. And demand is high. After announcing, Sotheby’s Financial Services upsized the issuance from $500m to $700m. Institutional asset managers who are hungry for new investments are eager to diversify their holdings and art-backed loan portfolios is a novel investment category, and is largely uncorrelated to financial markets, public equities or other traditional asset classes.

As long as the loans are underwritten responsibly by the loan originator and the valuations of the artworks are accurate, there is strong downside protection. And loans backed by art are comparatively conservative, compared to other asset-backed loans. For example, the loan-to-value ratio on a mortgage might be as high as 90%. In contrast, the LTV for art loans is often 50%. So, the artwork must clear only 50% in the event of a default. But it is because of mortgage-backed securitizations that banks were able to transfer risk off their balance sheets and that home buyers only have to put up a fraction of the purchase price (mortgaging the balance). That won’t happen overnight in the art financing market, but these are early innings.

I predict that investors of all kinds will be looking for opportunities to gain exposure to a form of art investment that does not depend on appreciation of values.