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Rating Action:

MOODY'S LOWERS RATINGS OF SOTHEBY'S HOLDINGS, INC. (SR. DEBT TO Ba2 FROM Baa3) AND SOTHEBY'S, INC; RATINGS REMAIN UNDER REVIEW FOR FURTHER DOWNGRADE

22 Dec 2000
MOODY'S LOWERS RATINGS OF SOTHEBY'S HOLDINGS, INC. (SR. DEBT TO Ba2 FROM Baa3) AND SOTHEBY'S, INC; RATINGS REMAIN UNDER REVIEW FOR FURTHER DOWNGRADE

Approximately $100 Million of Debt Securities Affected.

New York, December 22, 2000 -- Moody's Investors Service lowered the rating of Sotheby's Holdings, Inc. ("Sotheby's") $100 million senior notes, due 2009, to Ba2 from Baa3, assigned a Ba1 senior implied rating to Sotheby's, and lowered the short-term debt rating of its subsidiary, Sotheby's, Inc., to Not Prime from Prime-3. The senior note and senior implied ratings remain under review for further possible downgrade. The downgrade reflects concerns over the financial and business impact of Sotheby's pending antitrust litigation settlements and its substantially increased reliance on secured bank debt (not rated by Moody's). The rating review will focus on: 1) the final terms of the settlement of its pending antitrust cases; 2) Sotheby's financial flexibility in addressing the scheduled maturity of its bank facility; and 3) progress in realizing operating result improvements from recent strategic investments.

The Ba2 rating reflects Sotheby's solid franchise within the auction services and art-related secured lending businesses. Moody's cited the company's strong reputation, long history, and commanding share in a near-duopoly industry as credit strengths. Moody's also views Sotheby's progress toward settling its United States civil and criminal price-fixing lawsuits as a positive step under the circumstances.

Nevertheless, Sotheby's net cash payments under the lawsuits and related litigation expenses are material, and coupon redemptions could have an additional meaningful adverse impact on cash flow and profitability. Moody's believes that the final settlement terms will broadly track the current preliminary terms, although further modifications, particularly for the civil suits, are possible and will be a factor in the rating review.

The rating agency also noted that the company's recent expenditures to develop an Internet business and to improve its York Avenue facilities, coinciding with the litigation payments, have weakened its balance sheet, with debt levels at historical highs for the company. With work near complete on its York Avenue facilities and the internet business now operational, the company projects decreased investment spending requirements for 2001, but operating cash flow is likely to remain weak. The proximity of the bank loan maturity also exposes Sotheby's to refinancing risk. Moody's indicated that Sotheby's ability to pledge its York Avenue property and secured art loans strengthens its bargaining position with the bank group, although simultaneously subordinates noteholders.

The company's Internet venture, although costly to start up, and other reorganization efforts offer avenues for improving operating performance, if successful. Still, Moody's cited the potential volatility of the industry over shorter time periods as a risk. There is uncertainty regarding several key business determinants, such as the relative strength of demand for live and electronic art auctioning services, and the availability of art for consignment in any period. This volatility could prove particularly stressful in what may be a period of slower economic growth and while the company's debt levels are high. An additional area of focus will be the incidental impact of the litigation on Sotheby's franchise value over the long term.

The Ba1 senior implied rating reflects Moody's fundamental credit assessment of the Sotheby's enterprise, without regard to priority of claims to collateral. The Ba2 senior note rating reflects the priorities of the senior secured bank debt in the capital structure. In addition, the notes are obligations of the holding company and do not benefit from subsidiary guarantees, in contrast to the positioning of the senior secured bank debt.

Sotheby's Holdings, Inc., through its operating subsidiaries, engages in auction activities, art sales, and residential real estate, primarily in New York and London, and in several locations worldwide. Sotheby's Holdings, Inc., headquartered in Bloomfield Hills, Michigan, reported approximately $443 million of revenue for calendar 1999.

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

New York
Jay A. Siegel
Senior Vice President
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

No Related Data.
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