HNWI and Art Finance

Fellow appraiser Cindy Charleston Rosenberg, ISA CAPP sent me an interesting article from Bloomberg Business on favorable terms HNWI are receiving from banks when using fine art as collateral.  As an example, they use casino mogul Steve Wynn who has secrued  loans from major banks at below 1%.  Now not many can commad such low rates, and the banks do admit the low rate is tied to the full business relationship.  I will say a 1% loan is certainly an incentive to borrow and invest in additional art. The article notes other banks and investment firms are looking into art financing.  Fine art collecting is an area where there are many HNWI, and where there is money, there are banks looking to take advantage and secure relationships.

Bloomberg reports
Being part of the 1 percent just took on new meaning.

That’s about the rate at which billionaire Steve Wynn is borrowing against his extensive art collection as wealth management firms push to win business from the world’s ultra-rich.

The casino mogul pledged 59 works of art as collateral for a loan from Bank of America Corp., one of several steps he recently took to raise cash, according to interviews and regulatory filings. The 73-year-old founder of Wynn Resorts Ltd. said the arrangements permit him to borrow at less than 1 percent.

“This is a great time to be poised with ample cash,” Wynn said in an e-mail through his spokesman.

The favorable terms highlight the increasing competition in the market for art lending, where wealth managers are seeking to win and retain top clients with lower interest rates than ever. Traditionally dominated by auction houses and banks such as Citigroup Inc., JPMorgan Chase & Co. and Bank of America, record prices for art and a surge in wealth among the world’s richest are attracting new players, including one venture backed by private equity firm Carlyle Group LP and Swiss wealth manager Pictet Group.

“We regularly hear from people interested in getting into this field, including private equity firms, commercial banks and individuals who want to fund deals on a one-off basis," said Thomas C. Danziger, managing partner at Danziger, Danziger & Muro who represents major banks and other lenders in structuring and documenting art loans. “My expectation is that it will only grow.”

Sweetened Terms
Wealth managers traditionally offered art lending as a courtesy service to their wealthiest clients. Some have sweetened the terms, issuing art loans based on a benchmark rate such as the three-month London interbank offered rate plus an additional 125 basis points, according to three people who familiar with the typical terms of such loans.

Consumers with more pedestrian levels of wealth pay a multiple of that, depending on their creditworthiness and collateral. The average rate for a $100,000 home equity floating rate loan is 3.79 percent, according to Bankrate.com. Pawnbrokers in New York can charge interest at annual rates of up to 48 percent.

Even for a wealthy bank client, Wynn’s rate is unusually low. While he didn’t disclose how the loan’s term, the maximum length for art loans is typically three to five years. Treasuries due in 2020 yield about 139 basis points, or 1.39 percent.

Personal Fortune
Wynn’s personal fortune has fallen about 30 percent this year to an estimated $1.9 billion, according to the Bloomberg Billionaires Index. That largely reflects the plummeting value of his stake in Wynn Resorts, whose shares have lost more than half their value in 2015, ranking the casino company as the fourth-worst performer in the Standard & Poor’s 500 Index.

The collateral backing the loan could be valued at $200 million, said Beverly Schreiber Jacoby, who has done art appraisals for borrowers and lenders for 25 years and who reviewed the filing but hasn’t seen the works in person. Schreiber Jacoby in 2010 testified as an expert in a high-profile dispute between Christie’s and CNET Networks Inc. founder Halsey Minor concerning the value of a collection of Richard Prince paintings.

Wynn, through his spokesman, said the estimate was inaccurate but declined to provide a number.

Among the art listed is Jackson Pollock’s “Number 12,” which at its last public auction at Sotheby’s in May fetched $18 million. The list also includes a sculpture of a male head by Alberto Giacometti that sold for $50 million at Sotheby’s in 2013, and Andy Warhol’s “Double Elvis (Ferus Type)” that sold for $37 million in 2012.

The collateral held by Bank of America also includes works by lesser-known artists, such as actor Sylvester Stallone and painter Robert De Niro Sr., the father to the “Taxi Driver” and “Goodfellas” star.

‘Major Client’
Extremely low rates usually are reserved for clients already doing a lot of business with the bank or as an inducement for them to sign up for more services, said Andrew Rose, a principal at Art Finance Partners, a boutique art financing firm in New York. Typical rates for art loans run as high as 5 percent, he said.

“It’s the same as if you are a major client of Citigroup or Chase, and they give you a great deal on a mortgage,” Rose said.

Officials for JPMorgan and Citigroup declined to comment.

“Art lending fills an important need for some of our art owner clients, and therefore, our portfolio has grown,” said Julia Ehrenfeld, a spokeswoman for Bank of America, which provides wealth management services through its U.S. Trust private bank and Merrill Lynch. “Our rates are competitive in the market and take into account the entire client relationship.”

New Players
Art loans are perhaps the most established portion of a market in which people take out personal loans on possessions of all types, ranging from wine collections to historical artifacts. Loans backed by art are expected to surpass $10 billion this year, doubling since 2011, according to art market research company Skate’s.

Carlyle and the private equity unit of Pictet, a Geneva-based wealth manager, said this month they are backing Athena Art Finance Corp. with $280 million of equity capital. Athena will offer loans equaling as much as 50 percent of the low estimate of a client’s collection, ranging from six months to seven years.

Morgan Stanley launched its Blue Rider Group unit in July, run by wealth manager Dan Desmond and Lauren Welsh Sparrow, to offer art loans and also handle investments for artists, collectors and museums.

Falcon Group, which specializes in corporate financing, last year started offering art loans through its Falcon Fine Art. The volume of deals is expected to reach $100 million in the next six months, said Chris Howarth, director at Falcon Fine Art.

Fastest Growth
For Sotheby’s, its financial services division has become the most profitable and fastest growing unit by making loans and advances that often help land consignments for the New York-based auction house, according to a Moody’s report published last month. Sotheby’s in June almost doubled the credit facility used to finance art loans to $1 billion, according to filings.

Although its interest rates are higher than at banks, Sotheby’s global presence, in-house network of experts and lawyers, and 25 years of underwriting allows it to move faster than others, Jan Prasens, managing director of Sotheby’s Financial Services, said in an interview.

Bank of America wants to double the $3 billion of art loans it has outstanding, in part by offering bargain basement rates, according to a person familiar with the Charlotte, North Carolina, company. Regulatory filings show that Bank of America has provided art loans to investor Arthur Samberg as well as a trust tied to Howard Marks, co-chairman of Oaktree Capital Group LLC, a Los Angeles-based money management firm.

One of the nation’s best known collectors, Wynn often displays art in his resorts, including several of the pieces pledged to Bank of America. He joins Steven A. Cohen, Tom Hill and Michael Steinhardt among the wealthy collectors who have previously taken bank loans against their art holdings, according to filings. Collectors typically take loans to fund other ventures, buy more art, or pay off debt.

“We are seeing more credit demand in the business than I have ever seen before,” said Asher Edelman, founder and president of art-financing company ArtAssure Ltd. “There’s an awful lot of demand from collectors who need cash and dealers who see opportunities.”

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