(Bloomberg) — A wealthy client at Bank of America Corp. pawned his fine art collection so he could borrow enough to buy a sports franchise. Another posted his cache of 19th-century American landscapes to renovate his property.
Such is the growing world of art lending – where pieces are used to secure loans, allowing their wealthy owners to use their collections for cash without having to part with prized possessions. Art sales have slowforcing many people to reevaluate their options. The big May auction season in New York fell by around 23% in value from last year, with the world's wealthiest waiting on the sidelines to buy.
“If you are an owner and need liquidity now, stop selling and instead borrow against your art, waiting for better market conditions,” said Adriano Picinati di Torcello, global coordinator of art and finance for Deloitte. This is contributing to the growth of the art lending market, he said.
As the market expands, Wall Street's biggest firms are ramping up their efforts by adding staff and marketing the service to new and existing clients. While the exact size of the market is uncertain, Deloitte estimates that outstanding art loans could top $36 billion by 2024, up from $29 billion to $34 billion last year. That also compares with $20.3 billion to $23.6 billion of such loans outstanding five years ago, according to Deloitte.
America's biggest banks are looking to expand their reach into the art market as a way to attract and retain some of the world's wealthiest individuals and families. Catering to the rich often means competing with rivals to offer more diverse products, combating the constant threat that customers may move their money elsewhere.
Art lending offers specific advantages to wealthy owners who value their investments as broader financial markets face volatility. Unlike stocks, art is not subject to daily fluctuations and appreciates annually.
“We're not asking what's the value of your Andy Warhol every day,” said Katy Lingle, head of lending solutions at JPMorgan Chase & Co. Private Bank.
The global art market has been cooled by the record high valuations that emerged from the pandemic. Although sales have fallen and values have retreated, the demand for art loans is there.
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Bank of America has seen new art-backed lines of credit grow more than 14% compared to a year ago, according to Drew Watson, head of art services. His art loan book recently hit the highest on record. Within JPMorgan's asset and wealth management business, art lending grew 1% year over year, in line with other loans in that business, according to a spokesman.
“Even in a higher-rate environment, people are still taking advantage of timely opportunities,” borrowing for their art rather than selling it at a discount or selling stock, Watson said.
Bank of America, since forming its art services group in 2017, has grown to capture over 30% of the market, according to a spokesman. The team, in which the bank continues to invest, has 12 specialists in the art market for lending, wealth planning and philanthropy. Bank customers who already have loans are keeping them, while utilization has remained around 70% this year, according to Watson.
“Strong retention and utilization is reflected in backlogs, which have remained strong,” he said.
Bank of America structures these loans at a variable rate, so over time the cost of capital can decrease if rates fall. The interest rate is based on the guaranteed overnight funding rate, plus a spread, Watson said. So as rates go down, loans like this are even more likely to go up.
Citigroup, which estimates its market share at 10% to 15%, has a stable art lending customer base because art loan rates are still favorable compared to other loans, according to Fotini Xydas , head of art finance at Citi Private. Bank.
“Even though rates are higher, art is a very stable asset over the long term, compared to other assets in terms of volatility,” she said.
Art loans work like lines of credit, so customers use them and pay them off as they can. They are available only to the wealthy, given the nature of the collateral. The larger the collection, the more flexibility there is for borrowers.
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To qualify at Bank of America and Citigroup, a collection typically must be worth at least $10 million, which secures a loan of $5 million or more. Bank of America typically offers a 50% loan-to-value, with each installment having a minimum value of around $100,000. Terms last from about one to three years, with an option to renew, and customers can still keep their protected pieces at home as long as they are within the US. Citigroup requires a minimum value of $200,000 per piece.
JPMorgan bases its loan sizes on the cash value and strength of the borrower. The bank looks for the diversity of the pieces, making sure they are “museum quality,” Lingle said. He also does a financial analysis on borrowers to make sure they can service the debt.
A Citigroup client who had collected pieces by Pablo Picasso and Claude Monet used them to secure a line of credit to cover taxes associated with estate planning, another common use for this product.
Another private equity director wanted a line of credit to help fund a capital call. Bank of America facilitated a $10 million loan to a borrower worried about market volatility, using his collection of postwar and contemporary art as collateral.
“There's margin, death, divorce and bankruptcy, so we have endless lending interest,” said Philip Hoffman, founder of The Fine Art Group, an art adviser and finance specialist that competes with banks.