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Rating Action:

MOODY'S DOWNGRADES SOTHEBY'S SR. NOTES TO B3; RATINGS REMAIN ON REVIEW DIRECTION UNCERTAIN

09 Aug 2002
MOODY'S DOWNGRADES SOTHEBY'S SR. NOTES TO B3; RATINGS REMAIN ON REVIEW DIRECTION UNCERTAIN

Approximately $200 Million of Debt Securities Affected.

New York, August 09, 2002 -- Moody's Investors Service downgraded the debt ratings of Sotheby's Holdings, Inc. The rating action follows the company's announcement that maturity of its credit facilities were extended for only six months. The short maturity leaves the company with less near term financial flexibility than Moody's had assumed it would have during a period of uncertainty about its eventual ownership and business strategies. The ratings remain on review, but the review direction has been changed to "direction uncertain" from "possible downgrade". The following ratings have been affected by these actions:

Senior implied rating to B1 from Ba3;

$100 million senior unsecured notes to B3 from B2;

$100 million senior unsecured shelf registration to (P)B3 from (P)B2.

Moody's does not rate Sotheby's $100 million senior secured revolving credit facility and $100 million term loan maturing February 2003.

The ratings and continuing review action reflect uncertainties about Sotheby's future strategies and financial profile as a result of its intention to seek a buyer for all or a controlling interest of its shares; high levels of seasonality and volatility in Sotheby's business lines; and the burdens of agreed-upon future payments arising from settlement of anti-trust actions against Sotheby's and Christie's auction houses. The ratings also reflect a restricted liquidity profile and reduced financial flexibility as a result of the short term maturities for Sotheby's $100 million revolving credit agreement and $100 million term loan, as well as the use of $30 million of cash to reduce the amount of the outstanding term loan from $130 million when the maturity was extended to February 2003.

The ratings are supported by the company's success in supporting its operations through the first half of this year with internally generated funds and cash on hand; sustainable improvements to its cost structure; the value of its franchise and the inherent value of unsecured assets, including considerable real estate holdings; and an improved competitive environment as a result of a change in strategy over the past year by the third-largest player in the international auction market.

The ratings remain on review with direction uncertain, reflecting the expectation of near term events which could affect Sotheby's credit profile. Sotheby's has announced that it is looking for a buyer for all or a controlling interest of its shares, and that it hopes to close a transaction before the February 2003 expiration of its credit facilities. These events add uncertainty to the existing volatility inherent in the auction business, where activity is dependent on economic and political conditions as well as unpredictable one-off events. The first half of 2002 was a relatively favorable one, and the third quarter could benefit from two well-publicized events. However, there is no guarantee of similar activity in the future. The review action also reflects uncertainty resulting from a surprise U.S. Appellate Court decision issued in March 2002, and whose status remains unresolved. However, the ratings do not incorporate the potential impact of an unfavorable decision in that case.

The uncertainty of the timing and ultimate success of the company's own sale creates heightened liquidity concerns, given the February 2003 maturity of the debt. Moody's is concerned that any delays or failure of the sale process could require Sotheby's to negotiate with its banks at an unfavorable time for the company. Mitigating that risk is the inherent value in the company's unsecured assets, including its headquarters building, and in the value of Sotheby's franchises in its various business lines. While the nature of its businesses creates short term volatility, the company's history demonstrates that it can generate positive operating income and cash flow over the medium to longer term.

The B3 ratings of the senior unsecured notes reflects their effective subordination to the secured obligations of Sotheby's and its subsidiaries, none of which guarantee the notes, and the minimal protections afforded to noteholders by the note indenture.

Sotheby's Inc., headquartered in Bloomfield Hills, Michigan, is one of the two largest auction houses in the world. Total revenues were $336 million for the year ended December 2001.

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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