Receivables

Accounts Receivable, Net—Through its Agency segment, Sotheby's accepts property on consignment and matches sellers, also known as consignors, to buyers through the auction or private sale process. Following an auction or private sale, Sotheby's invoices the buyer for the purchase price of the property (including any commission owed by the buyer), collects payment from the buyer, and remits to the consignor the net sale proceeds after deducting its commissions, expenses and applicable taxes and royalties. Sotheby's auction commissions include those paid by the buyer ("buyer's premium") and those paid by the seller ("seller's commission") (collectively, "auction commission revenue"), both of which are calculated as a percentage of the hammer price of the property sold at auction. For private sales, Sotheby's enters into a legally binding agreement with the consignor, which outlines the terms of the arrangement including the desired sale price and the amount or rate of commission to be earned upon completion of the sale. In certain situations, Sotheby’s may also execute a legally binding agreement with the buyer stipulating the terms of the private sale transaction.

Under Sotheby’s standard auction payment terms, payments from buyers are due no more than 30 days from the sale date and payments to consignors are due 35 days from the sale date. For private sales, payment from the buyer is typically due on the sale date, with the net sale proceeds being due to the consignor shortly thereafter. Extended payment terms are sometimes provided to an auction or private sale buyer and, for auctions, can vary considerably from selling season to selling season. Such terms typically extend the payment due date to a date that is no longer than one year from the sale date. In limited circumstances, the payment due date may be extended to a date that is beyond one year from the sale date. Any changes from the standard auction and private sale payment terms are subject to management approval under Sotheby's policy. When providing extended payment terms, Sotheby’s attempts to match the timing of cash receipt from the buyer with the timing of payment to the consignor, but is not always successful in doing so.

In the limited circumstances when the payment due date is extended to a date that is beyond one year from the sale date, if the consignor does not provide Sotheby's matched payment terms, the receivable balance is reclassified from Accounts Receivable to Notes Receivable in the Consolidated Balance Sheets. As of December 31, 2014, Notes Receivable within the Agency segment included $22.7 million of amounts reclassified from Accounts Receivable. As of December 31, 2013, no such Notes Receivable were outstanding. (See discussion of Agency segment Notes Receivable below.)

Under the standard terms and conditions of its auction and private sales, Sotheby’s is not obligated to pay the consignor for property that has not been paid for by the buyer. If a buyer defaults on payment, the sale may be cancelled, and the property will be returned to the consignor. Alternatively, the consignor may reoffer the property at a future Sotheby's auction or negotiate a private sale with Sotheby's acting as its agent. In certain instances and subject to management approval under Sotheby’s policy, the consignor may be paid the net sale proceeds before payment is collected from the buyer and/or the buyer may be allowed to take possession of the property before making payment. In situations when the buyer takes possession of the property before making payment, Sotheby’s is liable to the seller for the net sales proceeds whether or not the buyer makes payment. As of December 31, 2014 and 2013, Accounts Receivable (net) includes $116 million and $130.5 million related to situations when Sotheby's paid the consignor all or a portion of the net sales proceeds before payment was collected from the buyer. As of December 31, 2014 and 2013, Accounts Receivable (net) also includes $96.5 million and $92.1 million, respectively, related to situations in which the buyer has taken possession of the property before making payment to Sotheby’s. Included in the $96.5 million is $1.1 million associated with purchases made by a related party (see Note 20). This related party receivable was collected in the first quarter of 2015.

Notes Receivable, Net—As of December 31, 2014 and 2013, Notes Receivable (net) consisted of the following (in thousands of dollars):



December 31	2014		2013
Finance segment:
Consignor advances	$	25,994	$	139,007
Term loans	618,447		335,426
Total - Finance segment (net)	644,441		474,433
Agency segment:
Guarantee advances	25,000		28,000
Other loans	24,760		2,142
Total - Agency segment	49,760		30,142
Principal segment:
Secured loans	2,812		5,825
Other:
Unsecured loan	2,725		3,025
Total Notes Receivable (net)	$	699,738	$	513,425

Notes Receivable (Finance Segment)—The Finance segment provides certain collectors and art dealers with financing secured by works of art that Sotheby's either has in its possession or permits borrowers to possess. The Finance segment generally makes two types of secured loans: (1) advances secured by consigned property where the borrowers are contractually committed, in the near term, to sell the property through the Agency segment of Sotheby's (a “consignor advance”); and (2) general purpose term loans secured by property not presently intended for sale (a “term loan”).

A consignor advance allows a seller to receive funds upon consignment for an auction or private sale that will typically occur up to one year in the future. Consignor advances normally have short-term maturities. Term loans allow Sotheby's to establish or enhance mutually beneficial relationships with borrowers and may generate future auction or private sale consignments and/or purchases. Term loans normally have initial maturities of up to two years and typically carry a variable market rate of interest.

Prior to 2014, the lending activities of the Finance segment were funded primarily by the operating cash flows of the Agency segment, with the ability to supplement those cash flows with revolving credit facility borrowings. In January 2014, in order to reduce the Finance segment's cost of capital and enhance returns, Sotheby's established a separate capital structure for the Finance segment through which client loans are predominantly funded with borrowings drawn from a dedicated revolving credit facility. The establishment of the Finance segment's dedicated revolving credit facility in February 2014 has allowed management to debt fund a substantial portion of pre-existing loans and fund further growth of the loan portfolio. Cash balances are also used to fund a portion of the Finance segment loan portfolio, as appropriate. (See Note 9 for information related to the Finance segment's revolving credit facility.)

In certain situations, term loans are also made to refinance clients' auction and private sale purchases. For the years ended December 31, 2014 and 2013, the Finance Segment made $65.6 million and $62.2 million, respectively, of such loans. These loans are accounted for as non-cash transfers between Accounts Receivable (net) and Notes Receivable (net) and are, therefore, not reflected within Investing Activities in the Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such loans is classified within Operating Activities in the Consolidated Statements of Cash Flows. In 2014 and 2013, such repayments totaled $38.1 million and $76.4 million, respectively. As of December 31, 2014 and 2013, Notes Receivable (net) included $90.4 million and $62.9 million, respectively, of term loans made to refinance clients' auction and private sale purchases.

The collection of secured loans can be adversely impacted by a decline in the art market in general or in the value of the particular collateral. In addition, in situations when there are competing claims on the collateral and/or when a borrower becomes subject to bankruptcy or insolvency laws, Sotheby’s ability to realize on its collateral may be limited or delayed.

Sotheby’s target loan-to-value (“LTV”) ratio, which is defined as the principal loan amount divided by the low auction estimate of the collateral, is 50% or lower. However, loans are also made at an initial LTV ratio higher than 50%. In addition, as a result of the periodic revaluation of loan collateral, the LTV ratio of certain loans may increase above the 50% target due to decreases in the low auction estimates of the collateral. The revaluation of loan collateral is performed by Sotheby’s specialists on an annual basis or more frequently if there is a material change in circumstances related to the loan, the value of the collateral, or the disposal plans for the collateral. Management believes that the LTV ratio is the critical credit quality indicator for Finance segment secured loans.

The table below provides the aggregate LTV ratio for the Finance segment portfolio of secured loans as of December 31, 2014 and 2013 (in thousands of dollars):



December 31	2014			2013
Finance segment secured loans	$	644,441		$	474,433
Low auction estimate of collateral	$	1,349,094		$	1,180,406
Aggregate LTV ratio	48		%	40		%

The table below provides the aggregate LTV ratio for Finance segment secured loans with an LTV above 50% as of December 31, 2014 and 2013 (in thousands of dollars):



December 31	2014		2013
Finance segment secured loans with an LTV ratio above 50%	$	329,135	$	181,027
Low auction estimate of collateral related to Finance segment secured loans with an LTV above 50%	$	556,662	$	295,255
Aggregate LTV ratio of Finance segment secured loans with an LTV above 50%	59%		61%

The table below provides other credit quality information regarding Finance segment secured loans as of December 31, 2014 and 2013 (in thousands of dollars):



December 31	2014		2013
Total secured loans	$	644,441	$	474,433
Loans past due	$	22,409	$	24,129
Loans more than 90 days past due	$	—	$	1,266
Non-accrual loans	$	—	$	—
Impaired loans	$	—	$	—
Allowance for credit losses:
Allowance for credit losses for impaired loans	$	—	$	—
Allowance for credit losses based on historical data	1,166		1,746
Total allowance for credit losses - secured loans	$	1,166	$	1,746

Management considers a loan to be past due when principal payments are not paid in accordance with the stated terms of the loan. As of December 31, 2014, $22.4 million of the Notes Receivable (net) balance was considered to be past due. The collateral securing these loans has low auction estimates of approximately $83.5 million, resulting in an LTV ratio for these loans of 27%. Sotheby's is continuing to accrue Finance Revenue on these past due loans. In consideration of payments received to-date in the first quarter of 2015, the collateral value related to these loans, current collateral disposal plans, and negotiations with the borrowers, management believes that the principal and interest amounts due for these loans will be collected.

A non-accrual loan is a loan for which future Finance Revenue is not recorded due to management’s determination that it is probable that future interest on the loan is not collectible. Any cash receipts subsequently received on non-accrual loans are first applied to reduce the recorded principal balance of the loan, with any proceeds in excess of the principal balance then applied to interest owed by the borrower. The recognition of Finance Revenue may resume on a non-accrual loan if sufficient additional collateral is provided by the borrower or if management becomes aware of other circumstances that indicate that it is probable that the borrower will make future interest payments on the loan. As of December 31, 2014 and 2013, there were no non-accrual loans outstanding.

A loan is considered to be impaired when management determines that it is probable that a portion of the principal and interest owed by the borrower will not be recovered after taking into account the estimated realizable value of the collateral securing the loan, as well as the ability of the borrower to repay any shortfall between the value of the collateral and the amount of the loan. If a loan is considered to be impaired, Finance Revenue is no longer recognized and bad debt expense is recorded for any principal or accrued interest that is deemed uncollectible. As of December 31, 2014 and 2013, there were no impaired loans outstanding.

During the period January 1, 2013 to December 31, 2014, activity related to the Allowance for Credit Losses was as follows (in thousands of dollars):



Allowance for Credit Losses as of January 1, 2013	$	1,341
Change in loan loss provision	405
Allowance for Credit Losses as of December 31, 2013	1,746
Change in loan loss provision	(580		)
Allowance for Credit Losses as of December 31, 2014	$	1,166

The net decrease in the allowance for credit losses during 2014 is the result of better than anticipated loan loss rates.

As of December 31, 2014, unfunded commitments to extend additional credit through Sotheby's Finance segment were $13.7 million.

Notes Receivable (Agency Segment)—Sotheby’s is obligated under the terms of certain auction guarantees to advance a portion of the guaranteed amount prior to the auction. Such auction guarantee advances are recorded on the Consolidated Balance Sheets within Notes Receivable (net). As of December 31, 2014 and 2013, auction guarantee advances totaled $25 million and $28 million, respectively. (See Note 18 for information related to auction guarantees.)

In the limited circumstances when the payment due date for an auction or private sale receivable is extended to a date that is beyond one year from the sale date, if the consignor does not provide Sotheby's matched payment terms, the receivable balance is reclassified from Accounts Receivable to Notes Receivable in the Consolidated Balance Sheets. As of December 31, 2014, Notes Receivable within the Agency segment included $22.7 million of amounts reclassified from Accounts Receivable against which Sotheby's holds $3.9 million of collateral. As of December 31, 2013, no such Notes Receivable were outstanding. These Notes Receivables are accounted for as non-cash transfers between Accounts Receivable (net) and Notes Receivable (net) and are, therefore, not reflected within Investing Activities in the Consolidated Statements of Cash Flows. Upon repayment, the cash received in settlement of such Notes Receivable is classified within Operating Activities in the Consolidated Statements of Cash Flows.

Under certain circumstances, Sotheby's, through its Agency segment, finances the purchase of works of art by unaffiliated art dealers through unsecured loans. The property purchased pursuant to such unsecured loans is sold privately or at auction with any profit or loss shared by Sotheby's and the art dealer. As of December 31, 2014 and 2013, such unsecured loans totaled $2.1 million. Sotheby's is no longer accruing interest with respect to this unsecured loan, but management believes that the $2.1 million balance is collectible based on discussions with the borrower.

Notes Receivable (Principal Segment)—Under certain circumstances, the Principal segment provides secured loans to certain art dealers to finance the purchase of works of art. In these situations, Sotheby's acquires a partial ownership interest in the purchased property in addition to providing the loan. Upon its eventual sale, the loan is repaid, and any profit or loss is shared by Sotheby's and the dealer according to their respective ownership interests. As of December 31, 2014 and 2013, Notes Receivable (net) included Principal segment loans totaling $2.8 million and $5.8 million, respectively.

Notes Receivable (Other)—In the second quarter of 2013, Sotheby's sold its interest in an equity method investee for $4.3 million, and, as a result, recognized a gain of $0.3 million in Other Income. The sale price was funded by an upfront cash payment to Sotheby's of $0.8 million and the issuance of a $3.5 million unsecured loan. This loan matures in December 2018, is being charged a variable market rate of interest, and requires monthly payments during the loan term. As of December 31, 2014, the carrying value of this loan was $2.7 million.