Sotheby's Pitches a Bond Secured by Art Collections and a Museum Plays the Auction Game

Sotheby’s announces new backed security, but what is so new about it?

With New York’s major Modern, Post-war, and Contemporary May sales around the corner, all eyes are on the big-ticket items ready to hit the block, with Jean-Michel Basquiat topping the list at both Sotheby’s and Christie’s. This year, Sotheby’s Financial Services is pinning a little more on the work of the artist (alongside a selection of other blue-chip names, including Warhol and Rembrandt) thanks to the auction giant’s recent announcement of $700m of asset-backed Notes, which closed this week, on April 23. 

Those familiar with the art sector’s increasing professionalization and financialization will already be comfortable with the concept of loans linked to artworks. So, how does Sotheby’s ArtFi Master Trust differ? And what does it signal for the art market more broadly?

Andy Warhol and Jean-Michel Basquiat, 'Untitled,' 1984, 116 x 165 1/4 in.; Lot 105, Sotheby's Contemporary Evening Auction, May 13, 2024


More than a loan

Fundamentally, Sotheby’s latest scheme differs from pre-existing art loans (which are offered by several private banks and specialist lenders) because, rather than loaning against art works, it securitizes against loans, which are backed by artworks.

This shifts the level and spread of risk at play. In a traditional art loan, if the borrower fails to make payments, the lender can seize the collateral to recover the borrowed amount. Individuals and businesses often opt for this to gain short-term liquidity while retaining the use of their assets.

Conversely, securitization is a financial process where a variety of debts (including loans) are pooled together and then repackaged into interest-bearing securities which, in turn, are sold to investors. The cash flow from the underlying loans provides the return to the investors (as with mortgages and student loans). 

The two models establish different relationship structures, with the latter not just between borrower and lender, but instead introducing investors into the mix. 

Of course, the new scheme also introduces familiarities to traditional art loans, with paperwork including the usual disclaimers around the valuation of artworks and with many of the works in question remaining in storage (albeit some specialist art finance firms do allow works to remain on display or go on loan). 

A new financial vehicle for the future

So how will the new approach be received? That the auction house’s owner, Patrick Drahi, has a significant background in financial packaging has perhaps lessened any ‘surprise’ over such a move.

To date, interest is there, and the investment appears to be supported by key players in the market, notably Barclays, BNP Paribas and Morgan Stanley, according to the Financial Times. 

A press release from the auction house stated that ‘Morningstar DBRS is expected to rate the four classes of Notes at closing with the senior-most class expected to receive the highly coveted AAA (sf) rating,’ adding that ‘This highly successful transaction, which saw strong demand from institutional investors resulting in a significant upsize to the transaction, will help further our mission of unlocking the power of our clients’ collections through the delivery of innovative financial solutions.’

Perhaps another interesting statement it makes on the market’s future direction is the fact that NFTs are reportedly not included within the works available on the scheme.

Institutions are also turning to innovative financial strategies to support both acquisition goals and operational bottom lines. This month, the Toledo Museum of Art in Ohio announced that it has been placing guarantees at auction houses as a means to raise income. According to a report from Artnet, the cultural institution has been placing deals on works it has a ‘genuine interest’ in so if they are outbid, they still generate income, with almost $500k raised this year.

“The beauty of it is that they win either way. They get a work of art they want to buy or they make some money. That’s creative thinking. And we just need more and more of that,” said The Museum of Modern Art’s Director, Glenn Lowry, according to the same Artnet article.

Regardless of the long-term success of either Toledo’s or Sotheby’s latest financial ventures, it is perhaps Lowry’s sentiment which signifies the best approach to developing the market’s relationship with financial structures going forward.