Wealthy Seeking Cash for Investing, Margin Calls Turn to Art
(Bloomberg) — Last Monday, as oil prices dropped 30% and equities plummeted, a New York client of Fine Art Group requested financing against a $10 million painting by Jean-Michel Basquiat.
“We were already having a busy first quarter, but the last two weeks have seen an approximate two-fold increase in inquiries,” said Freya Stewart, who heads the art-financing division at Fine Art Group.
The rise in activity comes as the spread of coronavirus has created the wildest market swings since the financial crisis. While stocks rallied on Friday after President Donald Trump declared a national emergency, the recovery is proving short-lived: U.S. equity futures tumbled by their limits and Treasuries surged Monday as a massive emergency move by the Federal Reserve to ease lending failed to calm fears among investors about the rapidly escalating economic hit from the virus.
Those ructions are pummeling fortunes across the globe. Some clients want to free up cash for investment opportunities, lenders said. Others to offset the cost of margin calls after borrowing against stock holdings. UBS Group AG and Credit Suisse Group AG are among banks asking clients to provide additional collateral, according to the Financial Times.
The business of providing credit against Picassos and Warhols is expanding even as the art market grinds to a halt. As New York declared an emergency, several major galleries, including Gagosian, Pace, Zwirner and Hauser & Wirth, said they are closing. Fairs have been canceled in Europe and Asia, including Art Basel Hong Kong.
“Major high net-worth clients told us they are putting a halt on any purchases, privately or at auction,” said Elizabeth von Habsburg, managing director of Winston Art Group in New York. “Clients are saying: ‘You know what? We are not in the game right now.’”
Art financing has been attractive to banks and clients because the valuations don’t necessarily correlate with equities. As equity and debt market volatility jumped dramatically last Monday morning, Bank of America Corp. received inquiries from collectors looking to shift debt tied to assets that price daily, such as securities, to art as a way to lower margin call risk, said Evan Beard, art-services executive at the bank.
Banks use the client’s total assets to determine the credit line and typically lend as much as 50% of the collateral value. They also allow ultra-high-net worth customers to keep their art and offer rates as low as 1%. For others, boutique lenders offer quicker turnaround but charge higher rates.
Like corporations and consumers, many top-end art collectors have stepped up their borrowing given this era’s ultra-low interest rates. Art-secured loans jumped 40% since 2016, to at least $21 billion globally, according to a 2019 Art & Finance Report by Deloitte.
Fine Art Group has been contacted by wealth managers, credit brokers and art collectors based in New York, U.K. and Hong Kong.
“There are likely lots of collectors out there looking for liquidity in these and other regions who are just not aware that art-based financing can be a fast route to capital,” Stewart said.
With no end in sight for the spread of coronavirus, some clients want the safety of readily available capital, even if they don’t need it right now, Stewart said. Galleries and dealers are also preparing to be sufficiently capitalized for a period of potentially reduced trading activity, she added.