Sotheby’s Credit Rating May Fall to Junk Amid Losses, S&P Says
By Philip Boroff

Feb. 10 (Bloomberg) -- Sotheby’s credit rating may be cut to junk as the 265-year-old auction house’s revenue falls and its leverage increases amid what it calls “significant” losses from guarantees.
“We believe that revenues will decline substantially over the near term due to the decline in the worldwide art auction market,” Standard & Poor’s said in a statement yesterday, when it disclosed the possible downgrade.

Sotheby’s shares have fallen 84 percent since their October 2007 peak as the art market shrinks. Last week, the company’s evening sale of contemporary art in London netted 17.9 million pounds ($26.2 million), down 81 percent from the comparable auction’s total a year earlier.

S&P said Sotheby’s profit margins “fell precipitously” in 2008 because of losses from extending guaranteed sums to sellers. New York-based Sotheby’s has disclosed about $50 million in guarantee-related losses at recent auctions. It reports fourth- quarter earnings at the end of February.

S&P currently rates Sotheby’s debt BBB-, the lowest investment-grade rating.
Chief Financial Officer William Sheridan said the art market has “slowed,” though the auctioneer is “very comfortable with Sotheby’s liquidity.”
“Long-term, we’re very optimistic about the company,” he said in an interview. “Twelve months to me is long term.”

Buying Back Building
Sotheby’s also said yesterday in a filing that on Feb. 6 it completed the $370 million purchase of its York Avenue headquarters building from RFR Holding Corp. The closing was originally scheduled for July 1 of this year, though RFR -- controlled by art collector Aby Rosen -- exercised its option to move up the date. (Sotheby’s bought back the building after selling it to RFR in 2003.)

Citing the accelerated closing and losses from auction guarantees, Sotheby’s said it changed an agreement with its lending group led by Bank of America Corp. The auction house’s maximum leverage ratio will increase to 4.25 in the 12 months ending on March 31, up from the current 3.5 ratio. It will increase to 4.75 for the year ending June 30 and to 5.0 for the year ending Sept. 30.

Borrowing costs will increase for Sotheby’s. Under the new bank agreement, the company will be charged an interest rate of 3.25 to 4.5 percentage points above Libor, or the London interbank offered rate. Previously it had paid 1.75 percentage points over Libor.
Under the new agreement, Sotheby’s can borrow as much as $250 million, down from a limit of $300 million.
“It was our decision,” Sheridan said of the new limit. “It helped us negotiate a better deal.”