Private lenders want to create an artistic interpretation of financial slicing and dicing. The lending division of French billionaire Patrick Drahi's auction house, Sotheby's Financial Services, has priced $700 million in bonds that are secured by loans against the art collections of affluent buyers. It serves as an illustration of how non-bank lenders could be able to compete with conventional lenders with the support of a recovering securitization market.
It is not new to package loans into bonds with an investment-grade rating. Approximately half of the US securitization market was made up of deals supported by loans for automobile sales, with a record $144 billion in issuance in 2023, as per the Securities Industry and Financial Markets Association. The reason is simply that leverage gives lenders more firepower to make more loans and increases their earnings. A large number of insurers and money managers are in the market for "safe" assets, which drives demand.
The collateral is what makes Sotheby's offering different. There are countless identical Toyota Corollas on the road, making them easy to value. But the "The Scream" series by Edvard Munch is unique.
According to practitioners, this has aided in thwarting earlier attempts at art-backed securitization, causing independent lenders — especially Bank of America and Citigroup — to fall behind institutions that have access to less expensive capital. Nor has the situation of the securitization market helped either. The benefit of making a transaction was eliminated when buyers pulled back and bond issuance costs increased in response to rising interest rates intended to combat inflation.
However, a window has opened due to the market's perception that rates have reached their highest point and that a downward move is expected to occur next. According to SIFMA, asset-backed issuance is increasing by almost 52% from 2023 to this year. Conversely, transactions that fall outside of conventional categories, such as credit cards and cars, have made up the second-largest portion in ten years, as evidenced by the recent issues of notes supported by income from fiber-optic cables or music royalties.
Additionally, buyers may be able to accept the risk-reward ratio of these transactions if they have faith in Sotheby's distinct valuation expertise as one of the two leading art auction houses. Furthermore, confidence in the art pieces' appraisals can only be maintained for a limited amount of time due to the short loan terms. The well-crafted proposal was successful, as Sotheby's raised its offer from the $500 million it had originally said, according to IFR.
After this transaction, the lending division of the auction house claims to have over $2 billion in loan capacity. Its competitors, such as specialist stores like Art Capital Group or rival auctioneer Christie's, may follow closely behind. They would be partnering with longer-standing private lenders such as Blackstone. They are gaining ground on traditional financial institutions in the financing of buyouts and are now capturing a larger portion of the securitization market. While the "Scream" paintings might be one-of-a-kind, banks can be forgiven for letting out a little yell of their own.