S&P discovers the obvious, that auction volume is way down and likely to remain so. So it is threatening to lower Sotheby’s credit rating below investment grade citing losses from guarantees and the squeeze of purchasing their New York headquarters back from Aby Rosen. Bloomberg doesn’t mention that Sotheby’s has vowed to get out of the guarantee business for the near future but it does give the details on the company’s new, higher borrowing costs:

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.

[ . . . ] 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.” [ . . . ] 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.

Sotheby’s Credit Rating May Fall to Junk Amid Losses, S&P Says (Bloomberg)