Sotheby’s next hot auction: a Picasso-backed bond

Financial cubism. Francisco Goya’s Saturn devoured his son; Damien Hirst cut a shark into pieces. Financial markets are similarly keen on slicing and dicing. Now auction house Soby’s, owned by French billionaire Patrick Drahi, is bringing investment creativity to art world by parcelling and selling chunks of loans secured by Picassos and Manets. avant-garde $500 million securitization could boost art-backed lending. But re are good reasons why paintings have so far resisted such alchemy.

wealthy spend a lot on art: Ignoring pandemic-scarred 2020, annual sales have averaged $65 billion since 2014, according to UBS. Soby’s Mei Moses index, which tracks prices of repeat sales, grew at an 8.5% rate between 1950 and 2021. But collecting can be a financial drag. With value of privately owned artwork and collectibles exceeding $2 trillion, Deloitte reckons, re’s a lot of capital hanging on walls.

Collectors can unlock some of that by using ir Rothko paintings as security for a loan. wealth management arms of big banks provide credit, as do specialist firms like Ana Art Finance or Art Capital Group, as well as Soby’s and rival Christie’s. Loans are typically 40% to 60% of value of a collection, and lenders generally prefer multiple works by established 19th and 20th century artists. Loans that offer recourse to a borrower’s or assets may carry an interest rate of 3.5 percentage points or so over a benchmark, while non-recourse debt costs roughly twice as much.

Banks with big balance sheets and lower funding costs dominate market, which Deloitte pegs at maybe $34 billion of outstanding loans. Securitization could unlock new sources of financing. Slicing a portfolio of loans into tranches of varying risk, with ratings as high as AAA, can appeal to a bro range of buyers at attractive costs.

Art loans, though, are different from securitization staples like credit card and mortgage debt. Valuation checks only happen annually, and accurately divining worth of a one-of-a-kind Mondrian is a lot trickier than valuing a property. Art lenders have dabbled with securitization before, according to one practitioner, but could not attract enough interest from investors without costly insurance policies.

Soby’s offering is bigger, provides strict protections for investors, and offers valuation nous of one of world’s dominant auction houses. Even so, to overlook complications and appreciate a bit of financial cubism, staid buyers of asset-backed securities will have to rely on reputation of Drahi’s auctioneers.

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Soby’s on April 8 submitted a Securities and Exchange Commission filing for Soby’s ArtFi Funding. auction house will use vehicle to market a securitized portfolio of personal loans extended by Soby’s Financial Services to its customers, secured by value of ir fine art collections. Deloitte in November forecast that art-secured lending market would reach up to $34 billion at end of 2023, while predicting growth of 8% in 2024.