Banks and Auction Houses See Increased Borrowing Against Art

By ARTINFO

NEW YORK—Specialists at banks and auction houses are saying that in the face of a volatile stock market and a housing slump, many collectors are looking to take out loans against their art, the New York Sun reports. "Art now is seen as a definite asset class which is traded," said Caroline Sayan, Christie's international commercial director. "People are looking at their complete portfolios and thinking about how they can leverage what they have more effectively."
While select banks and Christie's and Sotheby's have offered art financing for a while, more collectors, galleries, trusts, and museums have recently begun to take advantage of it. The banks tend to structure their lending as term loans, which are due on a specific date, or lines of credit. The client may take out a loan against one specific work or an entire group for an amount generally up to 50 percent of the market value of the collateral.
Sotheby's offers term loans and revolving credit lines as well, but the auction houses more typically extend loans through consignor advances. Sayan said that Christie's usually advances between 30 and 50 percent of the low estimate of a consignment, while Jan Prasens, managing director of Sotheby's Financial Services, said the house often advances between 50 to 60 percent of the low estimate, depending on risk.
In order to protect their interests, banks and auction houses will often be named on a borrower's insurance policy and make UCC filings. They will also sometimes take possession of the collateral, particularly when the art or the borrower is out of the country. Even with these precautions, lenders can be left in the dust, as when dealer Michel Cohen fled the country in 2001 with $10 million in outstanding loans to Sotheby's. The house eventually succeeded in reducing its losses through a combination of recovery of assets and insurance, and Cohen was arrested in Brazil and then escaped while awaiting extradition.
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