Top 10 theses on the work of the companies that provide loans secured by art

• Author: Dan Bejar
  Law: The Times
  Source: latimes.com

In recent months, the service of providing secured loans of art objects goes to the next round of popularity. This happens with the start of each recession and the emergence of collectors need to monetize part of the collection. Given the relevance of the topic, we decided to dedicate the next series of the cycle "Just about the complex" collateral.

1. Service providing cash loans secured objects of art in a chaotic manner has existed since the advent of the banking system in the XV century in Italy. A centralized approach to these loans has been formed since the beginning of 2000-х, with the advent of financiers statistical databases and indexes — i.e. the ability to evaluate and to use art as a financial instrument. In to Deloitte Art Finance / ArtTactic, the value of all loans secured by art, in 2019 amounted to $21-24 billion (in 2013 the same figure was just below $6 billion).

2. At the beginning of the 2020 full-fledged departments to work with the art objects as collateral collateral in their structures have about 10 banks — among them UBS, Citibank, Emigrant Bank, Deutsche Bank, Goldman Sachs, US Trust, JP Morgan. Other banks claim this service, act as mediators, conducting transactions through larger structures. Along with banks, work and private mortgage company, which is essentially the art-ломбардами: Yield Tree, Artemis Borro, Fine Art Group, Griffin Art Partners, Art Finance TCP. Loans against art provide the auction house — Sotheby's, Phillips and Heritage Auctions. However, in contrast to the aforementioned associations, auctions do not give money for current needs, and provide loans to vendors of art — secured work for 6 months before the auction (up to 60 % of the mean estimate), customers — for future purchase, thus provoking a successful auction.

3. The vast majority of banks accepting art as collateral collateral located in the United States. This is due to the fact that the German banking system (which is used by Britain, the EU and the CIS) decided to amortize the assets taken on the balance, that is, from year to year in cost savings, suggesting the wear and tear of assets over time. In other words, European banks are unable to make their system of art, the value of which over time increases. Therefore, even such giants as Deutsche Bank and UBS, conduct these operations through offices in the United States. The us banking system the concept of amortization is adapted to any type of collateral. Unfortunately, in Russia today, banks such a service does not directly provide. In exceptional circumstances art as collateral the collateral the Bank can take have an esteemed client —, however, will at best be a facilitator and will place the Deposit in a foreign Bank in the worst — will take the balance at your own risk, and will continue for a long time to analyze the situation with the auditors.

4. The main motives of the owner to use the artwork as collateral collateral:

• the purchase of new works, expanding the collection;
• opening of a credit line under an alternative business;
• monetization of the collection;
• repayment of an existing debt;
• "fast money",the increase in asset liquidity;
• preservation of collections: a loan without the sale;
• option not to sell the painting, which is accompanied by high taxes (especially important in the United States in the taxation of inheritance), and to get a loan in monthly Bank payments.

5. The decision of the Bank on loans secured by works of art is determined by the following factors (in order of importance):

• the reputation of the client and his credit history;
• the presence of accompanying documents (confirmation of provenance, expert opinion report on the state of conservation, etc.);
• the level of liquidity contractors (the ability to sell them quickly in the event of insolvency of the customer);
• portfolio diversification (most banks don't take individual works and the portfolio. The average requirement for the composition of the portfolio: it must contain at least 4 works of different authors or periods and countries).

6. The amount and term of loan:

• in major banks minimum loan is $2-5 million, while each piece should cost at least $200-500 thousand In smaller banks are more loyal;
• the loan period depends on the investment attractiveness of the work is 18 months (modern art) to 30 years (the Impressionists and the old masters);
• the decision on granting a loan shall be made on average in a period of 2 to 4 weeks.

7. Rates:

• the base rate (usually LIBOR or Prime Rate — average interest rate of interbank lending on the international market) — on average 1,5–2,5 %;
• Bank fee for exclusivity of services — on average, 2-3 %;
• a Commission of the international insurance companies, providing risk minimization in exceptional cases (for example, when working with large diversified portfolios) — on average 1.5 %;
• the final lending rate is 6-8 % per annum.

8. When determining the loan (the amount handed out on bail) in practice, the following occurs:

• estimated current market value of the work with third-party — company-партнера Bank. As a rule, appraisal company underestimates the cost of the work 25 %;
• the decision of the Bank issued a loan in the amount of 40-60 % of estimated value of work (depending on the artistic value of a work of art, the quality of the papers on the provenance and other accompanying documents);
• thus pledged to the Bank remains the work for which he actually paid on average of 37.2 % of its market value. It is easy to calculate that the profitable Bank that the borrower did not pay 6-8 % per annum, and was insolvent: then, having a job, even at the market price, the Bank will receive considerably more income. That's because big banks calculate in advance the options of selling and have in their art-отделах dealers with experience and connections.

9. Additional terms and conditions of the Bank in lending are sometimes:

• the transfer of work to the Bank for safekeeping for the duration of the lending (while storing, the borrower pays an additional charge);
• the obligation of the borrower to keep the work in a certain place, regularly exhibit, catalog them, and perform other actions to manage the collection (with the aim of increasing valueasset that is beneficial to both parties) in the case of storage of art objects from the borrower;
• use loan exclusively as working capital of the existing business;
• the presence of the borrower other types of collateral: real estate, securities, etc. In this collateral de-юре is the object of art, but in the case of loan default, the claim of the Bank for the other assets specified in the agreement (the so-called subsequent pledge). For example, the property in subsequent pledge prefers to take Sotheby's — in the case of insolvency of the customer he sells it through its subsidiary, Sotheby's International Realty.

10. Note that along with banks, private companies and auction houses operate (all — in the US) a few liquidation companies that aktiviziruyutsya in times of crisis. They offer the receipt of cash in hands in a period of 3-5 days in exchange for a piece of art. The body of the loan is only 10-15 % of the market value of the collateral, however, requirements documents supporting the provenance requirements of the work, they almost do not push. We won't mention their names, on the basis of two considerations: in-первых, the turnover of the cash is subject to strict accounting and in this case is illegal. In-вторых, we would like to keep the collectors from contacting such companies, even considering the circumstances of the crisis. Main — to remember: since the start of the recession until the next market recovery inside high-quality piece of art, the money saved is better than many other assets.

Denys Belkevych, AI