Sotheby's Downgraded

The Wall Street Journal is reporting that Standards and Poors has reduced Sotheby's credit rating to junk status. This drops the rating by three notches The rationale being a drop in the art auction market. The article is rather short, so I took the liberty to cut and paste, or click HERE to read.

Standard & Poor's Ratings Services lowered its credit ratings on Sotheby's (BID) by three notches and into junk status, citing a substantial decline in the worldwide art auction market and potential near-term covenant violations.

Auction houses for the first time in years are struggling to secure enough top material to entice bidders as the economic downturn is forcing them to rely heavily on individuals to sell art for personal reasons.

Sotheby's has launched a restructuring plan over the past several months that includes salary reductions, multiple rounds of work force cuts and a dividend reduction, among other moves.

S&P, which warned in February it was considering a downgrade, cut its corporate credit rating on Sotheby's to BB- from BBB-, warning business will remain depressed through the year. The ratings firm had boosted Sotheby's ratings to investment-grade status in June following a seven-year stint in junk, citing its continued good performance and the successful implementation of various initiatives.

S&P added that without another amendment to its credit pact, Sotheby's is likely to breach a financial covenant in the near term. In February, Sotheby's secured an amendment to its senior secured credit agreement to allow it more flexibility. That deal also reduced its borrowing capacity under the pact by one-sixth to $250 million.

S&P credit analyst David Kuntz also pointed to a highly leveraged capital structure and weak credit protection metrics as reasons for downgrading Sotheby's.

The company, which is scheduled to report first-quarter results Thursday, expects to bring in between $179 million and $256 million at its spring auction sales in the next two weeks, down from $411 million at its auctions last fall and $742 million last spring. Strong sales could restore confidence throughout the global art market, but that confidence could be shaken further if collectors think the estimates are slightly high or the offerings remotely inferior.

Shares dropped 2.2% to $11.73 in recent trading and have lost more than half their value since September.