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Drahi paints debt masterpiece with Sotheby’s bond

3 minute read

A Sotheby's Paris employee poses with the 1941 painting "La Corrida (Le Matador dans l'arene)" (The Matador in the Arena) by French painter Francis Picabia at the Arenes de Lutece before its auction in Paris, France, March 10, 2021.

LONDON, May 13 (Reuters Breakingviews) - Sotheby’s auctions play host to the greats - Picasso, Monet, Rothko. The art house’s owner, Patrick Drahi, has made a fine art of playing the debt markets. His most recent masterpiece evokes the desperation of yield-starved credit investors.

Telecom tycoon Drahi, who in 2019 agreed to buy Sotheby’s for $3.7 billion, is planning to issue $300 million worth of bonds to pay himself a dividend. Following on from another $165 million debt-funded payout in November, that will take the auction group’s leverage to almost 8 times EBITDA according to Moody’s Investors Service. Assuming the new bond gets away as planned, Drahi will have taken about $465 million of cash out of the business during his brief ownership through those two deals alone, a handy one-third of the $1.45 billion of equity he initially put in, based on Moody’s data.

Admittedly, an imminent post-Covid rebound in global art sales will reassure investors who are studying the billionaire’s latest work. And Sotheby’s showed its resilience last year by cutting costs and switching to online auctions: digital sales of $285 million during the first 7 months of 2020 were higher than in the whole of 2019.

But the deal still looks risky. The lumpy, highly cyclical nature of the auctioneer’s business makes its cash flow unpredictable. The key Spring and Autumn selling seasons bring in the bulk of revenue, while global art sales tend to fluctuate wildly with the economic cycle: they slumped by 36% between 2008 and 2009, according to Art Basel and UBS.

Drahi is far from alone in using debt to pay large payouts. So-called dividend recapitalisations have soared to $42 billion so far in 2021, according to UBS data. Annualised, that would make it the busiest year since in at least a decade. With interest rates low, yield-hungry investors have little choice but to indulge borrowers like Drahi or private equity barons. The extra yield premium available on risky CCC-rated debt is less than 5%, the lowest since 2007, according to UBS.

The good times may not last. With inflation rising, the Federal Reserve may be forced to curtail bond purchases and push up rates. That may make investors less keen to indulge risky borrowers. Drahi’s desire to hold one last debt auction may be a warning that trickier times lie ahead.

Follow @liamwardproud on Twitter

CONTEXT NEWS

- Auctioneer Sotheby’s is planning to issue a $300 million bond to fund a dividend payment to owner Patrick Drahi, International Financing Review reported on May 12.

- It follows a $165 million debt-funded dividend in November 2020, which increased the company’s leverage to 7 times EBITDA according to Moody’s Investors Service.

- Drahi, a Franco-Israeli telecommunications tycoon, agreed to buy the art house in June 2019 for $3.7 billion.

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