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Would you spend more money on art if you thought that you could borrow money against its value? After all, buying art can be an expensive business and collectors are often loathed to part with it. Even collectors who do want to sell soon discover that art is an illiquid asset. If you could borrow against your prized Picasso, so much the better, and if you could borrow that money cheaply and channel that cash into something with a higher yield, art would start to look considerably more appealing as an investment.
The reality, though, is that art is hard to value and hard to authenticate and few mainstream banks want to lend against it. Some banks do offer art-secured loans at very low rates of around 2.5% to 3% to ultra high-net-worth collectors such as Steve Cohen, whose art collection is worth an estimated $1 billion.
Collectors at this level (and let's face it, not many collectors are) can use these cheap loans to buy property, businesses or even more art, but there's a big catch, and that it to arrange these loans, banks typically need to hold other assets with that institution that can be used to repay it. These borrowers are essentially taking out a loan against their whole portfolio, not just their art collection. Auction houses such as Sotheby's and Christie's also offer loans at competitive rates - as long as you are buying or selling art through them.
It is possible to take out a non-recourse, general purpose loan that is just secured against the value of your art from one of the other specialist lenders in the market. Interest rates here range from high single digits to well over 20%, but most lenders are only interested in making loans of over $500,000 and typically will only lend 40% of an artwork's value. That means you need to have an artwork worth at least $1.25 million to be considered.
Some companies like Borro will make short-term loans against lower value art and collectibles, but will charge you interest of between 35% and a staggering 83% on an annualized basis. Then there are the so-called loan-to-own lenders, who bet that borrowers will default on the terms of their loan so that they can sell their precious artwork and keep the profits for themselves.
Put all these different lenders together and current size of the art lending market is estimated at pound;6 billion ($9.6 billion) a year, according to Deloitte and ArtTactic's 2014 Art amp; Finance report, which was published last month. When you consider that global art sales last year were an estimated $63 billion, that isn't very much at all.
However, the same report predicts the art secured-lending market could triple in size with the help of some new art insurance products, including those that allow collectors to keep the art they borrow against hanging on their wall.
If their art is located in the US, collectors can already do this. Under the Uniform Commercial Code, lenders can place a charge on the art collateral in someone's home, but in most of Europe (except France, Belgium and Spain) and in other major art centers such as Hong Kong, lenders cannot register charges against art assets, so borrowers often have to hand over their art to their lender during the loan, which is not exactly an appealing prospect.
Today, though, some insurance companies are offering new products to protect the lender against the risks of letting the borrower keep the art. If the borrower grants a charge against the art collateral to someone else, or takes off with the art, or refuses to give it up if they default, the insurers will cover the lender for its loss.
Is this really going to result in the rapid growth of the art lending market, though? Dr. Tim Hunter, the head of Falcon Group's new art division, Falcon Fine Art, which has just launched in London, says the company plans to allow clients in England, Wales and potentially other countries, on a case-by-case basis, to keep possession of their art.
That is certainly a departure from the norm, but the company isn't relying on insurance to underwrite the risk. "Allowing clients to keep possession of their artworks is an important part of our model, but we're not relying on any external product that may or may not be able to insure this service," says Hunter, who is also an art adviser and spent 16 years at Christie's, where he was a senior director in its Old Master and British Pictures department, a director in its Impressionist and Modern department and head of 19th Century European Art. "Falcon Group have been doing asset-backed financings for 20 years and I have 20 years of experience in the art world. In the end, there's no short cut to knowing your client."
Falcon Fine Art plans to offer clients non-recourse loans of one to three years, with the option to extend, financed from the Falcon Group's own balance sheet. Although the terms will depend on the type of art, Hunter says interest rates will typically be in the high single digits and loan-to-value ratios will be 40%.
However, Paul Ress, managing director of Right Capital, another UK-based art finance company that matches borrowers, either individual collectors or professional dealers, with high-net-worth individuals that are willing to lend, thinks that the new insurance products for art lenders are one of the most interesting developments in the industry.
"They will allow more borrowers to keep collateral, while differential insurance, which hopefully is also coming soon, will insure lenders against a loss of capital if a painting has to be sold and doesn't cover the amount of the loan. In theory, that shouldn't be too expensive if you've done the right due diligence up front."
Right Capital, which is about to open an office in Luxembourg, organizes asset-backed, non-recourse loans of between pound;500,000 and pound;5 million ($800,000 and $8 million) at interest rates ranging from 8% to 13%. Its typical loan-to-value is 35% to 45% and the company is currently looking at ways to bring multiple lenders into individual loans to spread the risk. Ress hopes that as more companies start offering art loans, there will be more standardization throughout the market, which will bring costs down for borrowers and lenders alike.
Right now, though, organizing art loans is a complex business, because art is a complicated asset. Ress and Hunter say that each loan takes four to six weeks to structure, which includes the time it takes to put together all the documentation on the title of the art, its value, its provenance and authenticity. Valuation is particularly subjective and contentious and art prices are also volatile.
"Valuation can be so variable when it comes to art," says Ress. "We always form an internal view on what we think the valuation should be, obtain an independent view for the borrower, and insist that the lender obtains their own valuation too." Even then, he says that lenders are sometimes only comfortable loaning 30% of the value of some contemporary works.
That is why art lending is still a niche market. There may be an increasingly large mountain of money tied up in art around the world, but there's hardly a flood of new lenders that are dying to serve this market. On that basis, there's not going to be a three-fold increase in art lending any time soon.
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A secret HK$30 million consultancy agreement that Sun Hung Kai Properties co-chairman Thomas Kwok Ping-kwong said he had with Rafael Hui Si-yan was called into question in a high-profile graft trial yesterday.
Kwok was pressed as to why - if the 2003 deal existed - Hui turned to an SHKP subsidiary for a HK$3 million loan the following year instead of demanding payment from him. The loan was approved by fellow SHKP co-chairman and defendant Raymond Kwok Ping-luen.
The prosecution alleges that the Kwoks bribed Hui, the citys chief secretary from 2005 to 2007, to the tune of millions of dollars so that he would be SHKPs eyes and ears in the government.
Yesterday, Thomas Kwok admitted that according to the unwritten deal, he would have owed Hui HK$4 million by the time Hui applied for the loan.
Lead prosecutor David Perry QC asked him: Can you think of any good reason - if Hui is owed HK$4 million from you - hes going to your brother for a loan of HK$3 million? Do you have any good reason why a person in their right mind would do that?
Kwok replied: I find it strange as well. He did not chase me about that, and I forgot about it.
Hui borrowed the money from SHKPs Honour Finance. Perry asked Kwok: You must have thought, This is madness! Kwok said he did not regard that as unusual and did not know why Hui wanted the money.
A day after describing Hui as not telling the public the whole truth about his consultancy fees in 2005, Kwok said Hui failed to make the necessary declarations as managing director of the Mandatory Provident Fund Schemes Authority in 2003.
Hui was already living in two Leighton Hill flats free of charge in light of the forthcoming consultancy contract by the time the authority, under his management, renewed its lease at the IFC, which was managed in part by SHKP. He should have made the declaration, Kwok said.
The High Court also read a note written by then SHKP chairman Walter Kwok Ping-sheung, elder brother of Thomas and Raymond, in 2003. In the note, he called Hui cunning and greedy, suspecting he was lying about all the job offers he claimed to have rejecting when negotiating the SHKP contract. Thomas Kwok said Walter was paranoid and very confused at the time.
Hui, 66, faces eight charges related to bribery and misconduct in public office. Thomas Kwok, 63, faces one charge of conspiracy to offer an advantage to Hui and two counts of conspiracy to commit misconduct in public office. Raymond Kwok, 61, faces four charges, including one with Hui of furnishing false information. SHKP executive director Thomas Chan Kui-yuen, 67, and former stock exchange official Francis Kwan Hung-sang, 63, each face two charges.
All have pleaded not guilty.
The South China Morning Post does not make reports of ongoing jury trials available for comment by our readers. This policy applies to all such trials and is intended to ensure Hong Kong's laws on contempt of court are observed. Readers will be able to comment on these stories as soon as the trial concerned ends.
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The NCAA on Wednesday took steps to close a loophole regarding athletes ability to purchase insurance against injuries that might curtail their potential professional careers.
The NCAA announced its Academic and Membership Affairs staff approved a waiver to NCAA bylaws regarding amateur status and benefits, gifts and services. Under the waiver (first reported by blogger and NCAA rules expert John Infante), athletes can now borrow against future earnings to secure a loan in order to purchase loss of value insurance.
Until previous NCAA rules, athletes could only borrow against future earnings to purchase disability insurance, which would cover them in the event their college career was ended (and professional earnings eliminated) due to injury. But athletes were not protected in the event that they suffered an injury that caused them to drop several rounds in the draft and/or receive a much smaller signing bonus and salary.
In allowing an athlete to borrow money to purchase his or her own loss of value insurance, the NCAA is hoping to eliminate the role of agents, financial advisers or other third parties in such cases (whether legally or illegally). It also encourages member schools and conferences to introduce legislation regarding loss of value insurance that can be approved by the next NCAA legislative cycle in 2015-16.
In recent years, schools had used a loophole regarding the NCAA Student Assistance Fund to draw money from the fund and help athletes pay premiums on loss of value insurance. Texas Aamp;M did so with star left tackle Cedric Ogbuehi, as did Florida State with Heisman Trophy winning quarterback Jameis Winston, in effect encouraging them to stay in school another year before turning pro.
The full text of the NCAA waiver is below (bolded portions by NCAA):
Academic and Membership Affairs Staff Approves Waiver for NCAA Bylaws 12.1.2 (amateur status) and 16.11 (benefits, gifts and services). October 15, 2014. The academic and membership affairs staff approved a waiver to allow a Division I student-athlete to borrow against his future earnings potential to secure a loan from an established, accredited commercial lending institution, for the purpose of purchasing loss-of-value insurance. The Division I amateur status and benefits, gifts and services legislation specifies that student-athletes may borrow against their future earnings potential from an established, accredited commercial lending institution exclusively for the purpose of purchasing insurance (with no cash surrender value) against a disabling injury or illness that would prevent the individual from pursuing a chosen career, provided a third party (including a representative of an institutions athletics interests) is not involved in arrangements for securing the loan. Staff waived the normal application of the amateur status and benefits, gifts and services to permit the student-athlete to secure a loan to pay for the premium for loss-of-value insurance under the same circumstances that a student-athlete is permitted to obtain a loan to pay the premium for disabling-injury insurance. In issuing this waiver, the staff noted that the intent of NCAA Division I Proposal No. 2009-23 was to address the growing trend within the community of agents and financial advisors to arrange disabling-injury insurance policies and loans for student-athletes and to allow institutions to assist student-athletes with securing insurance in order to eliminate improper third-party involvement and alleviate the pressures on student-athletes to seek out this assistance from third parties. The staff also noted institutions are encouraged to work with their conference offices to propose legislation for the 2015-16 legislative cycle. Absent changes to the current legislation, requests for waivers will continue to be reviewed by the NCAA Division I Legislative Council Subcommittee for Legislative Relief. See Case No. 732679 in Requests/Self-Reports Online (RSRO) via the search tab.
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PORT OF SPAIN, Trinidad (Trinidad Express) - The Government will not resort to borrowing money if the budgeted price of oil falls below US$80, Finance Minister Larry Howai has said.
The minister was responding to e-mailed questions from the Express last week as crude oil prices continued a sudden plunge on global markets that has caused governments around the world to brace for potential budget shortfalls.
For instance, Venezuelas 2015 budget will be based on a target oil price of US$60 perpbarrel that countrys government announced on Friday night.
Oil has dropped more than 25 per cent since June on strong supply, signs of weak demand growth and indications that key oil producers, particularly Saudi Arabia, have a limited appetite to cut output to bolster prices.
United States November crude settled at US$82.75 on Friday.
Responding to how the oil price plunge could affect Trinidad and Tobagos budget, Howai stated oil and gas prices are important variables for our budget, but context is also important.
But what if oil slips below US$80, which is what the 2014-2015 budget is based on?
Howai said regarding measures to address a price below US$80, based on analysis, we do not see this as likely to be a prolonged situnot;ation and, in any event, unless the price of gas and related derivative commodities also show a significant decline, it is unlikely that we would have to do anything.
The 2014-2015 budget was also based on a gas price of US$2.75 per million British thermal units.
But we also consider the worst case and, in such a situation, the short answer is that we would not borrow to make up the shortfall, Howai stated.
We have already begun an exernot;cise to address expenditure and that process will be acceleranot;ted if prices do fall below US$80 for an extended period and if gas prices also follow suit.
Howai acknowledged we continue to follow closely the price of oil but note that any response by us will depend on two factorsfirstly, whether the reduction in price is for an extended period and, secondly, what is happening with gas prices.
Gas prices make a bigger contribution to budgeted revenues than oil and have been a bit better than budgeted and are so far partially offsetting the effects of lower oil prices, he told the Express.
We established US$80 as the benchmark for oil for a number of reasons, he said, giving two reasons in his analysis.
The first is that Saudi Arabia, the main swing producer in OPEC (Organisation of Petroleum Exporting Countries), needs oil at US$92 per barrel to balance their budget. Although, it should be noted that given their foreign exchange reserves of over US$750 billion they have a lot of room to sustain prices below $92.
In addition most shale oil producers require prices at $80 to $85 per barrel to break even. Prices much below this level results in curtailment of investment and output. This would result in prices moving back up in the short term, he said.
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