Last Monday, as oil prices dropped 30 per cent and equities plummeted, a New York client of Fine Art Group requested financing against a $10 million (Dh36.7m) painting by Jean-Michel Basquiat.
Days later, with equities tumbling to the largest single-day decline since 1987, a major London gallery called for fast capital to opportunistically buy a contemporary art collection. A Swiss client asked for a loan against $30m worth of rare diamonds.
As global stocks took another tumble on Monday, a collector who recently bought about £15m (Dh67.4m) worth of art during the London auctions asked Fine Art Group to help settle upcoming payment obligations on some works through art financing.
“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 desire, or need, for loans comes as the spread of coronavirus creates the wildest market swings since the financial crisis. While stocks rallied on Friday after President Donald Trump declared a national emergency, the recovery was short-lived. Equities globally tumbled on Monday after a massive emergency move by the Federal Reserve failed to calm fears among investors about the rapidly escalating economic hit from the virus.
The ructions are pummelling fortunes across the globe. Some clients want to free up cash for investment opportunities, lenders said. Others need to offset the cost of margin calls after borrowing against stock holdings. UBS Group and Credit Suisse Group are among banks asking clients to provide additional collateral, the Financial Times reported.
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, David Zwirner and Hauser & Wirth, said they were closing. Fairs have been cancelled 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 received enquiries 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 per cent of the collateral value. They also allow ultra-high net-worth customers to keep their art and offer rates as low as 1 per cent. For others, boutique lenders offer a 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 per cent since 2016, to at least $21 billion globally, found a 2019 Art & Finance Report by Deloitte.
Fine Art Group has been contacted by wealth managers, credit brokers and art collectors in New York, the UK 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,” Ms 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, Ms Stewart said. Galleries and dealers are also preparing to be sufficiently capitalised for a period of potentially reduced trading activity, she said.
Updated: March 17, 2020 09:58 AM