November 25, 2011

How to Turn Art Into Liquidity

For investors who are art-rich but cash-poor, art banking could provide the liquidity they may be seeking

The art market continues to generate profits for savvy collectors. Recent auctions at Christie’s, Sotheby's and Phillips de Pury generated sales of $635 million, exceeding most expectations.

According to the Economic Times, Christie's raised a total of $325.9 million and a near 100% sale for its post-war and contemporary art sale. Sotheby's recorded its third-highest total for a contemporary art sale and the highest since May 2008 with $315.8 million. Philips De Pury saw $71.3 million with 85 percent sold by lot.

The strong price performance in many art sub-markets is good news for your clients who collect those works. In some instances, however, your collector-clients may find themselves art-rich but cash-poor, especially if some of their other investments like real estate have declined significantly.

Art banking could provide the liquidity these clients need. It’s a specialized form of lending in which artworks serve as collateral. Several auction houses and major financial institutions offer the service, including Sotheby’s, Bank of America (BAC), Citigroup Private Bank (C), Emigrant Bank and JPMorgan (JPM).

In addition, several boutique lenders specialize in art-backed loans: Fine Art Capital, Art Capital Group and Art Finance Partners, for example.

Clients’ motivations for borrowing against their art works vary. Claire MacAndrew, editor of “Fine Art and High Finance” lists several:

  • Divorce
  • Estate-planning strategies
  • Asset diversification
  • Life insurance premium financing
  • Charitable giving
  • Annual exclusion transfers

Other borrowers may view their art as potential collateral for other non-art investments. In October, Bloomberg reported that Michael Steinhardt, the former hedge-fund manager who has an extensive art collection, was using part of the collection to secure low-cost funding for real estate investments.

According to the report, Mr. and Mrs. Steinhardt pledged 20 paintings and drawings, including five by Pablo Picasso and one by Jackson Pollock, as collateral for a loan from JPMorgan Chase Bank NA.

As with any loan, lenders can provide funds for a variety of purposes and through multiple borrowing options. These include interest-only or amortizing term loans; bridge loans against asset that are slated for auction; lines of credit that users can draw down as needed and acquisition loans to acquire items the borrower wishes to buy.

Loan terms vary. Some lenders allow the borrower to retain possession of the art while others take possession for storage or public display. Loan rates depend on the usual credit-rating factors, although the valuation of fine art as collateral is much more subjective than valuing securities, for example.

For some borrowers, however, their art collections may be a source of less expensive financing than the alternatives.

Some private banks are providing art loans to top clients at 200 to 300 basis points above Libor, according to Bloomberg. One-year Libor is still below 1%, so borrowers who can get such favorable terms could see substantial interest savings.

No wonder the Mona Lisa is smiling.

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