S&P: Sotheby's Senior Unsecured Notes Rating Raised To 'BB-'; Recovery Rating Revised To '3' From '5'

S&P Global Ratings today revised its recovery rating on Sotheby’s $400 million senior unsecured notes to '3' from '5'. The '3' recovery rating indicates our expectation for meaningful recovery (50%-70%; rounded estimate: 55%) for debtholders in the event of a default. We also raised our issue-level rating on the senior notes to 'BB-' from 'B+'.

ISSUE RATINGS--RECOVERY ANALYSIS

Key analytical factorsWe have valued the company on a discrete asset valuation (DAV) given that the company's business model relies heavily on the value of inventory assets and receivables, which are predominantly authenticated fine art, decorative art, jewelry, wine, and collectibles. We also include the estimated value in a default scenario of the Manhattan headquarters in our DAV. Our simulated default scenario contemplates a significant decline in the worldwide art auction market perhaps because of global economic turmoil, which results in a precipitous drop in Sotheby's revenue and margins. We expect these events, in turn, would impair Sotheby's ability to meet its fixed-charge obligations, resulting in covenant breaches, and ultimately in a payment default. The company has worldwide operations and the senior secured revolver facilities have foreign co-borrowers that are obligors with respect to its foreign borrowings. In the event of a payment default, we believe the company would likely file for bankruptcy protection in the U. S. only leaving foreign jurisdictions out of bankruptcy if it could to mitigate administrative complications from a multi-jurisdictional bankruptcy case. Simulated default assumptionsSimulated year of default: 2022Receivables drop commensurately with revenue decline and we assumed a 40% decline in receivables and inventory, to which we applied an 85% realization rate. 60% draw under the total $1.1 billion asset-based lending revolving credit facility (both agency and SFS facilities are pari passu) as it is subject to borrowing base. Value in the Manhattan headquarters that exceeds the amount of the mortgage given a 65% LTV covenant that takes effect in 2020.Simplified waterfallNet recovery value after 5% admin expenses: $1.1 billionPriority claims: $220 million in mortgage debt and $677 million in first-lien revolver debtNet recovery value of $236 million that could satisfy the assumed $410 million and accrued interest on the unsecured senior note debt Estimated recovery range for unsecured noteholders: 50% - 70% (rounded estimate 55%)
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