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Top art lenders have asked borrowers for more pictures as security for their loans because the value of their collateral has tumbled in an art market slowdown.
Specialist lenders in the $40bn sector have issued margin calls as the value of paintings pledged against loans has fallen, asking borrowers to make up for the decline by handing over cash or swapping in more expensive artworks.
Art lenders, including Sotheby’s and Christie’s, take security over artworks owned by borrowers so they can take possession and sell the pieces in the event of a default.
Although a niche area of finance, consultancy Deloitte estimated in a 2023 report that the total volume of art-backed loans outstanding would grow to $40bn by the end of this year, with the value of artworks pledged as collateral potentially worth double that.
Sotheby’s, which has a loan book of $1.6bn and launched a bond backed by its art loans last year, had made margin calls because “there are very few categories where the value of art has gone up in the last 24 months”, said Sotheby’s Financial Services global head of lending, Scott Milleisen.
Christie’s, which has an art-backed loan book of around $600mn, had also seen a “handful” of examples of “margin-call activity”, according to the global managing director of its art finance arm, Sayuri Ganepola.
“Most of ours have actually settled in cash, given the strength of our borrower base, but others have provided additional collateral if that’s something that they wanted to do,” Ganepola said.
Lenders said margin calls in the art finance sector were relatively rare. Banks ideally tried to prevent triggering margin calls on their clients by making them aware of any gap in advance, said Adam Russ, global head of wealth management and business lending at Deutsche Bank.
“Whether it be particular artists not performing or a glut of paintings from any artist coming to market, that might lead to a conversation,” he said.
But a softening market has meant resilient demand for art-backed lending despite a higher interest-rate environment, lenders said.
The value of art market sales fell by 4 per cent to $65bn in 2023, according to a report from Art Basel and UBS Art, with a particularly sharp decline in auction lots fetching more than $10mn. Last year, Sotheby’s total sales slid 23 per cent to $6bn, while Christie’s declined 6 per cent to $5.1bn.
Collectors reluctant to sell at low prices used art-backed loans as “a way to create liquidity out of something that’s just sitting there”, said Nishi Somaiya, global head of private banking, lending and deposits at Goldman Sachs.
Lenders generally seek pieces worth more than $200,000-$250,000 and by more than one artist to avoid concentration risk, and prefer Impressionist and Modern works over those of emerging artists without a proven auction record.
Ben Gore, chief operating officer of Christie’s, said it would also lend against jewellery “but not furniture or clocks or some of the more esoteric categories”.
But even when the art market is stronger, borrowers can be asked for more collateral. Gore said: “Even in strong markets you sometimes see some artists going down in value because of the trends and whims of some artists’ markets.”
