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Rating Action:

MOODY'S CONFIRMS SOTHEBY'S, CHANGES OUTLOOK TO POSITIVE

11 Apr 2003
MOODY'S CONFIRMS SOTHEBY'S, CHANGES OUTLOOK TO POSITIVE

Approximately $200 Million of Debt Affected

New York, April 11, 2003 -- Moody's Investors Service confirmed the debt ratings of Sotheby's Holdings, Inc. and assigned a positive rating outlook. This ends the ongoing rating review first started when Sotheby's antitrust challenges arose in 2000, and which resulted in several ratings downgrades. The ratings were most recently on review with direction uncertain, pending a decision about a change of ownership. Sotheby's controlling shareholders recently announced they would not seek a partial or total sale of the company in the near future. All remaining liabilities emanating from the antitrust action have been determined or settled over the past few months.

The following ratings were confirmed:

Senior implied rating of B1;

$100 million 6.875% senior unsecured notes due 2009 at B3;

$100 million senior unsecured shelf registration at (P)B3.

The rating confirmations reflect Sotheby's high effective leverage at current performance levels; the near term expiration of its bank facilities in February 2004; and the need to finance legal obligations and retention payments over the near to medium term.. The ratings continue to recognize the risk of top line and balance sheet volatility due to competitive issues and the reliance on a relatively small number of showrooms and sale dates which could experience disruption. Moody's recognizes that Sotheby's remains a closely-held company. While a sale of the company is not expected in the near future, a change in control at any time in the future could result in changes to business and financial practices.

The ratings are supported by Sotheby's effective and opportunistic management of its balance sheet in a difficult business and banking environment; its ability to sustain cost reductions, which should allow it to operate through the current business trough and benefit from operating leverage when revenues rise; the expectation that Sotheby's can remain cash flow neutral to slightly positive even in a continued weak business environment; and an improved capital structure due to the repayment of short term debt through the sale/leaseback of its York Avenue headquarters in early 2003. The ratings are also supported by the considerable brand equity in the Sotheby's franchise.

The B3 rating of the senior notes reflects structural subordination resulting from a lack of guarantees from any of Sotheby's operating subsidiaries, and their effective subordination to secured bank debt and capital lease obligations.

The rating outlook is positive. Moody's expects Sotheby's to maintain fixed charge coverage levels in a politically and economically challenging environment, and believes the company can continue to manage its balance sheet appropriately. Liquidity available through its modest revolving credit facility is supplemented by cash on its balance sheet following the sale-leaseback of its headquarters building. Sotheby's is well positioned to improve its financial and operating measures when the business cycle improves. A rating upgrade is possible if Sotheby's maintains operating discipline and reduces effective leverage over the medium term. Ratings or the rating outlook could decline if the company suffers unexpected deterioration in its operating performance or credit measures.

Moody's expects Sotheby's lease-adjusted debt to EBITDA will remain above five times during the next year. Fixed charge coverages remain appropriate for its rating category, with EBITDAR to fixed costs of about 1.6 times and EBITDAR less capex to fixed costs of about 1.2 times for the fiscal year just ended. Moody's expects Sotheby's operating results to benefit in 2003 from annualized cost savings initiated in the last 18 months. Cash flow should improve in 2003 and beyond due to reduced employee retention payments and lower expenses for systems and facility improvements. Offsetting these benefits will be the payment of legal settlements to various private and government parties over the next five years.

Sotheby's Holdings, Inc., headquartered in Bloomfield Hills, Michigan, is one of the two largest auction houses in the world. Total revenues were $345 million in 2002.

New York
Edward Young
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Marie Menendez
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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