The latest 10Q filing by international auction company Sothebys (NYSE:BID) revealed a growing presence of guarantees and loans in its auction operations, as noted by Oliver Chen, analyst at Citi Research Equities.
In a note to investors, Chen acknowledged the fact that the level of the guarantees and loans is consistent with the level of competition to acquire important artworks, but he pointed out that it might also increase risk for Sothebys (NYSE:BID). According to Chen, the risk depends on the amounts offloaded to third parties, and/or failure to sell artworks.
Sothebys changed its credit agreement
In addition, Chen also noted that the aggregate LTV of secured loans dropped slightly from 48% LY to 46%. Sothebys (NYSE:BID) also changed its credit agreement to allow a $300 million in net guarantees from its previous net guarantees of $100 million. Chen said the international auction company currently has $167 million gross guarantees compared with $114 million LY.
According to Sothebys (NYSE:BID), the primary risk confronting its operating results is the competition for consignment, which could affect its commission margins negatively.
Buyer’s premium schedule for Sothebys is encouraging
However, Chen emphasized that the newly implemented buyer’s premium schedule at Sothebys (NYSE:BID) is encouraging. He believed that it could mitigate potential revenue downside from competition. He added that cost reduction initiatives could help improve Sothebys’ overall position in competition.
With regard to the changes in the credit agreement, Chen emphasized that the company enabled more risk taking. Since August 2009, Sothebys maintained a syndicated credit facility, and currently has borrowing against it. The company amended the terms of the credit facility over the past year to extend the maturity from 2014 to 2017, and it increased its borrowing capacity from $200 million to $300 million. The allowable net auction guarantees were also raised from $100 million to $300 million. Furthermore, the agreement has a $20 million letter of credit, and does not have restrictions on dividends and repurchases.
York Property is a wholly owned subsidiary of Sothebys
Chen further noted that Sothebys (NYSE:BID) no longer stated its intention to pre-pay or refinance the mortgage of its York Property in July 2015. The company calculated that the fair value of the mortgage is around $228 million. York Property is a wholly owned subsidiary of Sothebys and it is excluded in the secured assets in its credit agreement.
Moreover, Chen noticed that the international auction company removed a claim that Yorl Property’s transactions “must yield attractive post-mortgage value and provide funds for relocation.”
Sotheby’s wrote in its 10-Q filing that it is exploring the value of its London property with outside investors. In September, the management of the company indicated its plan to sell its headquarters in Manhattan, and evaluate its balance sheet and financial strategy amid pressures from activist shareholders including hedge fund managers Dan Loeb, Mick McGuire, and Nelson Peltz.