As part of an effort to woo the ultra-rich, U.S. brokerages increasingly are offering loans collateralized by works of art to their most favored clients, offering a service that was once solely the province of mahogany-walled private banks.
Earlier this month, UBS Wealth Management America unveiled to its brokers a plan to offer loans of up to $150 million collateralized by works of art, rare musical instruments and fine silver.
Megan Stinson, a UBS spokeswoman, said the service was started at the request of brokers. "Prior to this, UBS WMA had no way of solving for certain ultra-high-net-worth client requests where art was part of the collateral equation," she said. "We have significant investor appetite."
The move is the latest sign of brokerages' increasing focus on top-tier clients. Over the past year, Merrill Lynch, Morgan Stanley, Wachovia Securities, UBS and others have changed the way they pay brokers to encourage them to abandon less affluent clients. This year, Merrill stopped paying brokers on accounts of less than $250,000 a household. Many of its rivals have joined it in referring such clients to call centers and other "low-touch" services.
FORGOTTEN ASSET CLASS
Although the UBS loans are marketed to brokers through the securities-backed lending department of UBS Bank USA, they are made and underwritten by Emigrant Bank Fine Arts Finance, a subsidiary of privately held Emigrant Bank, which since 2005 has employed a small group of art world experts to assess collateral values. Emigrant pays a referral fee for each client sent by UBS.
Andy Augenblick, president of Emigrant Bank Fine Art Finance, said collectors and dealers looking for working capital are traditional borrowers, but real estate investors and private business owners have grown increasingly interested in the loans.
"There's a growing awareness that a lot of wealthy individuals own art, which has been kind of the forgotten asset class," he said.
Private banking units of Citigroup, JPMorgan Chase and Bank of America have long offered art-backed loans to very wealthy clients who buy a variety of trust, estate and banking services. They tend to make loans of up to 50 percent of the appraised value of artwork, with appraisals primarily done by auction houses or in-house specialists. In most cases, borrowers are allowed to retain possession of the artwork.
Banks in the business offer relatively uniform interest rates -- art loans are currently made at about 5.25 percent -- but specialists outside private banking such as Emigrant offer longer maturities than the one- to three-year preference of the private banks. They also tend to have higher loan minimums than the $1 million floors that Emigrant and other specialists accept from UBS and other financial institutions.
Until recently few brokers or banks were in the business because of the expertise needed to evaluate the volatile market conditions in fine and decorative art and the complex legal issues related to ownership certification. Augenblick said a growing number of financial institutions want to compete with the pioneers of art-based lending such as Citigroup.
He declined to name brokerage industry clients besides UBS but said brokerages are increasingly aware that some $50 billion of art is traded annually while traditional asset management fees are shrinking after more than four years of rock-bottom interest rates.
The referral arrangement through UBS's almost 8,000 North American brokers should "spur growth across the entire global art-finance industry," he said.
Just 22 percent of private banks surveyed in 2011 by Deloitte Luxembourg said they advised clients to consider art-collateralized loans. However, one-third of respondents said they were giving thought to adding art lending within two to three years.
AUCTION HOUSES AND CONSULTANTS
Tighter lending controls in Europe and the United States have generated additional referrals to Emigrant, Augenblick said, as have the concerns of wealthy retirees who fear that plummeting rates are eroding their principal. Many art owners want to preserve liquidity without absorbing the heavy auction-house fees and capital-gains taxes that would come from outright sales, he said.
Morgan Stanley, which boasts the biggest U.S. brokerage force through its majority-owned joint venture with Smith Barney, makes art-backed loans through third parties but has not seen great demand for the service, a spokeswoman said.
A Bank of America spokeswoman said the fine-art lending services of its U.S. Trust private banking unit are available to any clients they "make sense for." She declined to say whether art loans are actively marketed by Merrill Lynch brokers.
Art owners eager for short-term cash have other options. Auction houses will advance loans on art and sculpture consigned to them for sale. Consulting services such as Art Capital Group offer loans and credit lines to borrowers with riskier art assets -- including those of contemporary artists, which can fluctuate widely in value -- though often at double-digit interest rates.
Art-based loans are not without risk. Art Capital made headlines three years ago by seizing three residences and all the copyrights collateralizing a $24 million loan to celebrity photographer Annie Leibovitz that was in default. The two parties ultimately reached a settlement that returned the copyrights to Leibovitz.
Merrill Lynch, now owned by Bank of America, made loans totaling $177 million in 2005 and 2006 to a jewelry dealer named Ralph Esmerian that were collateralized by gilded objects made for Marie Antoinette and Czar Nicholas II, among others. Esmerian used the same collateral to secure a $40 million loan from a different lender and was sentenced last year to six years in prison on embezzlement charges.
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