Bloomberg reports from an SEC filing that Sotheby’s has guaranteed $166m worth of art directly to the seller in order to gain their consignments. The auction house has since laid off $23m of that risk through “irrevocable bids” or 3rd party guarantees. Both Sotheby’s and Christie’s have shied away from taking direct positions in works since the disastrous sales of November 2008 when guaranteed works were bought in at an unprecedented rate.
Direct guarantees allow the auction house to participate to a much greater degree in any value above the guarantee price. During the height of the credit boom, the auction houses were generating profit at the top end of the market through the aggressive use of guarantees. Since 2008, however, both houses have sought to displace risk while still obtaining works to sell.
Sotheby’s (BID) said it entered into auction guarantees totaling $166.4 million, according to a filing, in a move aimed at winning consignments ahead of major New York sales in November.
Sotheby’s recently increased borrowing capacity to provide as much as “$300 million of net outstanding guarantee exposure,” Chairman and Chief Executive William Ruprecht said in an Aug. 6 conference call.
“We did this to enhance our flexibility as we negotiate deal opportunities and hopefully provide us with an opportunity to improve margins and profitability by taking prudent balance sheet risk,” he said.
The New York auction house said today that it’s reducing its exposure by “irrevocable bids” of $23.5 million, which are from undisclosed third-party guarantors. It may further reduce risk by additional “irrevocable bids” ahead of auctions in the fourth quarter, it said in the filing with the U.S. Securities and Exchange Commission.
Since Christie’s is a private company, we cannot know if they’ve also resumed the practice but it would seem highly unlikely that they could stay away in a competitive market.