Auction houses embark on damage limitation exercise as market slumps

Sotheby’s borrows $250m, Christie’s reduces credit terms, and Phillips negotiates firm’s takeover by Russians

LONDON. Auction houses are reducing guarantees, lowering reserves and reigning in credit arrangements in the wake of a slew of weak sales in London and Hong Kong last month. Wall Street analyst George Sutton at Craig-Hallum says we are now entering “what could be a challenging year for the auction market”.

The most visible acknow­ledgment of the need to shore up positions came as Sotheby’s drew $250m of its $300m credit facility arranged with Bank of America in 2005. In its 14 October filing to the US stock exchange, Sotheby’s said that the borrowing “was done as a defensive step to ensure additional liquidity in response to recent turbulence in the global financial markets”, adding it already had $290m in cash prior to drawing on this facility.

The firm has meanwhile seen its share price plunge. At the end of October 2007, Sotheby’s shares were trading at $55 each, valuing the company at $3.7bn; by 28 October, this had fallen to $8, valuing it at around $550m, without taking into account its debt obligations.

A subsequent filing reveals that “as a result of certain of the guaranteed property failing to sell or selling for less than the minimum guaranteed price” at Sotheby’s Hong Kong sales and contemporary auctions in London, the firm lost $15m on the $60m that it had guaranteed. As a response, Sotheby’s has reduced the level of guarantees it is prepared to offer. Its current financial exposure to auction guarantees is down 50% from last year.

Although Sotheby’s financial adjustments are the most visible, there are also signs that Christie’s is having to protect itself from the financial storm. Its contemporary auctions were also disappointing and while the company does not comment on its financial position, there is no reason to believe it is dramatically different from its main competitor’s. The works guaranteed at its forthcoming New York impressionist and contemporary art evening sales in November are valued at up to $225m, whereas last year they totalled $441m.

The firm has also decided to “modify” its policy of offering credit to customers, clamping down on some of its more generous allowances by insisting that clients now pay for the works they buy before walking away with them. With higher-value purchases, the company says it is still able to offer “extended payment terms” (provided the seller agrees), but it has certainly distanced itself from bearing any credit liability, except for the use of its recently introduced credit card up to a limit of £75,000.

Meanwhile, at Phillips de Pury, the group announced its sale to the Russian luxury goods company Mercury Group, although no details were forthcoming from the new owners. What they made of Phillips’s disastrous contemporary auction in October (which had a total of £5m against an estimate of £18.7m-£26.2m) remains to be seen. Phillips de Pury has guaranteed only one work at its forthcoming contemporary sales in New York.

Attention now turns to this month’s New York sales (3-14 November), where the total value on offer will be $1.7bn, $981m of which is with Christie’s.

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