• Contemporary Evening Results = Nicely Within Estimate Range & Impressive vs. LY — $266.591mm vs. an adj. estimate range of $254.8-358.7 (unadjusted ex. buyers premiums $221.6-311.9mm).  Results are impressively +108% vs. LY’s $128.104mm sales and 81% of lots were sold (encouraging performance).
• Stock Traded ~13% Off of March Peak of $40 But BID Stock Unlikely to Get a Free Pass on EPS We Believe: Citi’s View of Key Risk Factors Ahead of EPS — (1) We acknowledge 1Q & 3Q are smallest rev. qtrs but we remain cautions on potential for salaries, related costs, general, administrative cost deleverage given our view of revenue contraction of -16% or worse 1Q. (2) We model continued aggregate auction sales revenue contraction in 2Q given superb 1H11.  (3) Macro changes in the mood in Western Europe could have mixed implications given positive of incremental European supply & negative of increased economic volatility keeping customers at bay
• Our Thoughts on the Call’s Tone — Mgmt likely to remain cautiously optimistic, highlight recent marquee sale results, highlight the competitive nature of the marketplace, acknowledge unchartered macroeconomic times, articulate the strong nature of the business model, and speak to global opportunity especially in Asia
• Dial-In 1Q12 EPS on 5/10/12 — BID reports AMC ~4pm with conference call to follow at 4:45pm (888-371-8897 & 970-315-0479 #75311102).
• Citi’s 1Q12 EPS Estimate — 1Q EPS estimate is $(0.15) based on -16.1% overall revenue contraction and key cost drivers salaries and related costs growing +0-1% vs. LY, and general and administrative expenses growing +1% vs. LY.
• Incrementally Positive Takes from Citi’s Proprietary 5/9/12 Call on Auction Industry with Artvest LLC — (1) Art market has returned to its pre-crisis size at $64.9mm in 2011 vs. $62-$66 in 2007-2008 with strong potential to increase again in 2012; (2) Sotheby’s has become the most dominant player in NY for Impressionist/Modern; (3) China now the world’s largest consumer of art at 30% vs. US 29%. Replay: (404) 537-3406, #77659762, (5/9/12 – 5/16/12), ID#: 77659762.
• Corporate Access: Oliver Chen & Kate McShane Host a Watch Collector & Industry Reception at Antiquorum Auctioneers in NYC with Michael Friedman, Horological Director and Watch Expert, Mon June 11^th — Key topics will include watch collecting fundamentals and primer; watch valuation drivers; competitive positioning of brands including Rolex, Patek Philippe, Omega, and others; Q&A, and a special viewing of Auction sale lots for Antiquorum’s upcoming sale “Important Modern & Vintage Timepieces, Part 2” which will take place on June 12^th.

Analyst Call 5-9-12

Citi and Artvest Presentation May 2012

Citi Report

As an offshoot of the growing acceptance of art as an asset class, there is increased interest and activity in art financing (collateralized lending with art as the underlying asset). In consultation with several industry leaders, Artvest estimates the current size of the pre-dominantly US-based art financing market to be in the range of US $7 billion and growing.

Two notable articles in the press in the last few months, one on Michael Steinhardt’s estimated US $ 40 to 50 million loan with JP Morgan and the other covering Martin Margulies’ recent borrowing from US Trust, have drawn mounting attention to the space. In both instances, loans against art collections were used to source low-cost borrowing for funding real estate investments.

For these two savvy investors and passionate (not to mention visionary and talented) collectors, this was a “no-brainer” business decision; a way to put money to work, borrowed at low interest rates (generally in the range of 2.5 to 3.5%), in investments where they could expect returns far in excess of their borrowing and transaction costs. For individuals who qualify for an art loan from a private bank, at today’s rates, it is more often than not a very smart wealth management strategy.

But what about those who don’t qualify for this type of loan? This is a significant and underserved segment of the art market. Private banks favor loans and clients within a very specific and narrow range: for example, generally they won’t lend against watches and jewelry, many types of decorative arts or fine art if there is not a well-established and liquid secondary market. So, it is easy to get a loan against a work by Warhol but very difficult to get a loan on one by Banksy.

And unless you are that rare type of dealer who has done so well that you have a substantial balance sheet of assets aside from art inventory, you can be almost certain you will not find a warm welcome at most banks. Moreover, these institutions require the borrower be able to pay off the loan from a source other than selling the art collateralizing the loan. In other words, if you really need the loan for a pressing liquidity problem, generally a private bank is not a viable alternative.

For those who don’t qualify for an art loan from their private bank, the choices are few, protective regulations non-existent, and interest rates and fees can range from high (14%) to usurious (24% per annum). Some of these lenders are also unscrupulous – engaging in loan-to-own practices and bait and switch pricing – preying on desperate or naïve borrowers. In addition to charging exorbitant rates, many ultimately aim to acquire the art either in a distress situation or through misleading or abusive legal documents. Basically, they are the subprime lenders of the art industry.

Despite these apparent flaws, the art finance industry is more developed in New York than anywhere else in the world. This is a result of two factors: a) the ability of the lender to place a lien under the Uniform Commercial Code (UCC filing), allowing borrowers to keep possession of their art and b) New York’s position as both an art and financial capital, with a population of collectors who expect to be able to put all of their assets to work, even their art.

Outside of New York – particularly in the UK and Europe where there is a much higher ratio of asset rich/cash poor collectors than the US – the financing of art collections remains a poorly understood and undeveloped market. One reason for this is a residual cultural stigma against borrowing. Another is the lack of the UCC lien system mentioned above. And yet another is circumstantial: the current debt market problems in the EU countries have caused constraints on all types of lending, of which art is considered, unfairly, the most problematic.

What is a collector to do who is looking for an art loan if he or she does not meet the requirements of a private bank? Do your due diligence. Get references. Hire an objective third party who knows the space to find options to suit your particular needs. There are a few fair and reasonable lenders but they may be very difficult to find. Borrowing from the wrong one could result not only in paying more than you should, but possibly the loss of your collection as well: Caveat Emptor.