The "Art of Borrowing"

Art collections have long been used as collaterals for loans since the 17th century. In fact, Dutch master painter Rembrandt used his works to secure sorely needed loans to sustain his lavish lifestyle.

Currently, the practice is enjoying a renaissance as many art collectors are locked suddenly into illiquid assets cause by the popping real estate bubble and subprime credit meltdown.

New York-based Emigrant Bank Fine Art Finance says a valued client has recently borrowed against his US$100 million art collection. In the case of auction house Sotheby's, it reports that advances to sellers and term loans rose 23.2% at the end of the first quarter from a year ago to US$284 million.

However, banks are quick to point out that their borrowers are not short on means - just liquidity.

A client of Citigroup's art lending service, explains his cash is often tied up in investments; thus, he turns to financing from Citi Art Advisory when other funds aren't immediately available to build his collection.

Indeed, some collectors have used art loans to build an impressive array of antiques and master pieces.

With regard to the term of the loans, it varies according to the client's credit worthiness and paying ability, and duration of the loan. Thus, the longer the terms of the loans, which can run up to 20 years, the higher the interest rates. But other than that, banks are also examining the collections per se. Works by prominent, established artists that enjoy consistent demand are preferred.

Emigrant Bank Fine Art Finance says its lowest rates, based on LIBOR (London Interbank Overnight Rate), are currently about 4.2%, while the higher end loans are based on the U.S. prime rate, which is currently about 7%. Interest on Sotheby's advances, meanwhile, averaged 9.1%.

Paintings are usually being used as collaterals by most borrowers. Sculptures and rare musical instruments, like Stradivarius violins, are also sometimes used. But a big part of the appeal to borrowers is that the art remains with the borrower. Banks rarely demand to take possession of the art work, giving the collector some peace of mind in the process.

*Source: Financial Times (July 1, 2008).