(Bloomberg) — One wealthy Bank of America client put up his art collection as collateral to secure a loan to buy a sports franchise. Another used his collection of 19th-century American landscapes to renovate his property.
This is the booming world of art-backed lending — where art is used to secure loans, allowing wealthy owners to tap their collections for cash without having to part with their prized possessions. Art sales have slowed, forcing many to reassess their options. The main May auction season in New York fell by about 23 percent in value from a year earlier, with the world’s richest waiting on the sidelines to buy.
“If you’re an owner and you need liquidity now, you pause the sale and instead take out a loan against your art, waiting for better market conditions,” said Adriano Picinati di Torcello, global art and finance coordinator at Deloitte. That’s contributing to the growth of the art-backed lending market, he said.
As the market expands, Wall Street’s biggest firms are stepping up their efforts, adding staff and promoting the service to new and existing clients. While the exact size of the market is unclear, Deloitte estimates that outstanding art-backed loans could surpass $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.
The biggest U.S. 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 wealthy often means competing with rivals to offer more diverse products, while facing the constant threat that clients will move their money elsewhere.
Art-backed loans offer specific advantages to wealthy owners who are evaluating their investments as broader financial markets face volatility. Unlike stocks, art is not subject to daily fluctuations and is valued annually.
“We’re not asking what your Andy Warhol is worth every day,” said Katy Lingle, head of U.S. lending solutions at JPMorgan Chase & Co. Private Bank.
The global art market has cooled from the record valuations that have emerged in the wake of the pandemic. Even as sales slow and values fall, demand for art-backed loans remains.
Bank of America saw new art-backed credit lines rise more than 14% compared with a year ago, according to Drew Watson, head of art services. Its lending book for such collateral recently hit its highest point on record. Within JPMorgan’s wealth and asset management business, art-backed loans rose 1% year over year, in line with other lending in that business, according to a spokesman.
“Even in a higher rate environment, people are still taking advantage of opportunities,” borrowing on their art rather than selling it at a discount or selling shares, Watson said.
Since forming its art services group in 2017, Bank of America has grown to capture more than 30% market share, according to a spokesman. The team, in which the bank continues to invest, has 12 art market specialists in lending, estate planning and philanthropy. The bank’s clients who already have loans are keeping them, while utilization has remained around 70% this year, according to Watson.
“Retention and strong utilization are reflected in outstanding balances, which have remained strong,” he said.
Bank of America structures these loans with a variable rate, so over time the cost of capital can decline if rates fall. The interest rate is based on the secured overnight financing rate, plus a spread, Watson said. So as rates fall, loans like this are even more likely to rise.
Citigroup, which estimates its market share at 10% to 15%, has a stable base of art-backed loan clients because rates on those loans are still favorable compared with other loans, according to Fotini Xydas, head of art finance at Citi Private Bank.
“Although the fees are higher, art is a very stable asset over the long term compared to other assets in terms of volatility,” she said.
Art-backed loans work like lines of credit, so borrowers draw on them and repay them as they can. They are only available to the wealthy, given the nature of the collateral. The larger the collection, the more flexibility there is for borrowers.
To qualify with Bank of America and Citigroup, a collection typically needs to be worth at least $10 million, which warrants a loan of $5 million or more. Bank of America typically offers a 50 percent loan-to-value, with each piece worth a minimum of about $100,000. Terms range from about one to three years, with the option to renew, and clients can still keep their pieces safe at home as long as they are in the U.S. Citigroup seeks a minimum value of $200,000 per piece.
JPMorgan bases the size of its loans on the value of the collection and the strength of the borrower. The bank looks for a diversity of pieces, ensuring they are “museum quality,” Lingle said. It also does a financial analysis of borrowers to ensure they can service the debt.
A Citigroup client who had collected several pieces by Pablo Picasso and Claude Monet used them to secure a line of credit to cover taxes related to estate planning, another common use for this product.
Another private equity executive wanted a line of credit to help finance 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 are margin calls, death, divorce and bankruptcy, so we have infinite interest on loans,” said Philip Hoffman, founder of The Fine Art Group, an art finance and advisory specialist that competes with banks.
