The auction house posted a financial disclosure last week that raised a lot of interest but what about all those guarantees?

This commentary by Marion Maneker is available to AMMpro subscribers. (The first month of AMMpro is free and subscribers are welcome to sign up for the first month and cancel before they are billed.)

It wasn’t supposed to be this way. Going private was supposed to alleviate Sotheby’s need to deal with public disclosures that could roil the art market. Yet last week Sotheby’s issued an independent auditor’s report of the auction house’s financial statements for 2019 and 2018 that caused a flurry of questions about the firm’s future in the wake of the global pandemic.

Although Sotheby’s is no longer traded on the public stock market, it was acquired with a substantial amount of debt. That debt requires the company to be audited every year to protect the bondholders. Deloitte did the oversight work. As part of that audit, Sotheby’s management was required to assess their business as a going concern. It just so happens that all of this routine compliance took place during a cessation of the bulk of Sotheby’s business activity.

Those events prompted Sotheby's to make a statement like this in a financial disclosure posted on the company’s website last week:

Due the significant uncertainty associated with the material adverse impact the COVID-19 pandemic has had on our operations and liquidity, we are unable to predict or quantify with certainty the effect on our liquidity, our ability to meet our obligations when they become due, or our ability to maintain compliance with our financial covenants under the New Credit Facilities Agreements over the next twelve months.

One can only imagine the astonishment—mixed with excitement and fear—in offices around Manhattan as Sotheby’s competitors read the disclosure. Was Sotheby’s about to default on its bonds? How could have this have happened so quickly?