Sotheby’s says that it is using more guarantees because of increased competition with Christies. In its latest Quarterly Filing, it said losses from guarantees cost it $3.86 million in the three months up to September 30.
In August GE Capital arranged a loan that allowed Sotheby’s to double the amount it offers in auction guarantees from $300 million to $600 million.
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“This season, our use of auction guarantees has increased in order to secure some unique high-value consignments,” said Bill Ruprecht, CEO, President and Chairman of Sotheby’s.
Auction houses offer guarantees to sellers to win the right to sell their works. If the guarantee is not reached the auction house buys the work. In return for offering the guarantee, the auction house receives a percentage of any sale that goes above the guarantee. The auction house or third party can then sell the work.
Auction houses can also sell part or all of the guarantee on to another party. In some cases they do this by lining up a third party bidder that agrees to buy the piece for the amount of the guarantee.
Ruprecht said: “We underwrite these guarantees on an individual bases when we see them as creating value for the company and I think that you are going to see this move around and in some cycles be quite low and in some cases continue to be a robust milt-hundred million dollar book based upon what we see, what we’re offered and what we have confidence in.”
In 2008 Sotheby’s lost $60.2 million when the falling art market meant guarantees were not reached. Although this was partially offset by $43.8 million in auction commission revenues earned from property sold, so the overall guarantee loss was $16.4 million. Nearly all of this loss came from Autumn sales.
This compared with 2007, where guarantee revenues were $57.8 million, consisting of $76.9 million in commissions and $19.9 million of guarantee losses.
In its 2009 Annual Report it said: “As a result, we have dramatically curtailed the use of auction guarantees until stability is restored in the global economy and financial markets.”