The Loan Shark of Lake Saint Clair
Yesterday, the New York Times broke the story that Art Capital Group, a firm whose hustle involves extending loans collateralized by fine art, had offered to help pull the city of Detroit out of bankruptcy hell with up to $3 billion* in financing at a 5.5 to 8.5 percent interest rate…provided the principle is backed by the Detroit Institute of Arts’ entire permanent collection.
(*Note: There appear to be varying reports about the upper limit of the loan. The Times, which received a leak of ACG’s terms sheet, pegs the max at $3 billion. Other reports, such as the Detroit Free Press’s, state that the offer goes as high as $4 billion.)
Regardless of the ceiling, the would-be deal is an eleventh hour power-up of a prior ACG offer earlier this year, in which the fund tried to entice the Motor City’s emergency manager (and more to the point, its slavering creditors) with up to $2 billion at a six to nine percent rate.
The city declined that offer. Instead, it’s spent most of the last six months moving toward an $816 million ’grand bargain’ that would wrap the DIA’s collection in financial kevlar by allowing the museum to permanently buy itself out of city control. Yet with some apparent discord about the bargain rippling among key players as it nears completion, the more robust terms being offered by ACG look like a desperation heave from behind the half-court line to try to disrupt the game in its final seconds.
If you’re wondering what I think of the fund’s proposed deal, here was my immediate reaction on Twitter:
So yes, it’s fair to say that I’m skeptical of ACG’s intentions. Lacking any inside information, here’s a brief rundown of why, as well as a few conjectures about what’s happening behind the scenes.
One of the sharpest and truest darts of wisdom I’ve ever heard about the art of negotiating came from Joe Banner, the former CEO of my hometown Cleveland Browns. It doesn’t appear I’m going to be able to hunt down the exact quote, but after he was questioned by the local sports media in 2013 for trading draft picks with the Browns’ blood rivals, the Pittsburgh Steelers, Banner tersely explained that in his book, you only make a trade if you think you’re the one winning the trade.
In other words, melt down the old saw about how a good deal is one that leaves both sides a little unhappy. If you’re proposing terms in any transaction–whether it’s a pro sports trade, an art finance loan, or a divorce settlement–those terms should be designed so you’re coming away from the negotiation with your counterpart’s scalp in hand. Otherwise, why make the offer at all?
The reports I’ve read about ACG’s freshly proposed loan all go out of their way to mention that the fund has earned accusations of predatory lending for smaller scale deals in the past–and you know it’s bad when Goldman is trying to distance itself from another financial entity for PR purposes.
But even if I didn’t know this angle, I would have believed that ACG was operating with Banner’s mindset. Banks and other funding arms don’t exactly have a rich history of philanthropic motivation when dealing with bankrupt entities.
And why would they? They’re businesses. They exist to make money. And for that reason, when they have leverage, they tend to exploit it.
Combine this truism with the Joe Banner directive, and I feel strongly about a few points. The first is that ACG clearly thinks it’s emerging from a $3 to $4 billion loan backed by the DIA’s holdings as a conquering champion. And it’s not hard to see why.
In reality, it would be all but impossible for ACG to suffer in this deal. If Detroit upholds its end of the bargain, the fund collects 5.5 to 8.5 percent interest on a ten figure principle–not exactly dog shit to be scraped off their shoes.
But if Detroit defaults, then the fund immediately forecloses on the loan and takes possession of the world’s only (potentially) available encyclopedic museum collection. And in my opinion, it’s a safe assumption that ACG’s only makes this new offer if they’re confident the deal ends in this latter scenario.
Based on the proposed loan terms, the fund has obviously concluded that the DIA’s collection is worth substantially more than $3 or $4 billion. In fact, they’ve admitted as much. As reported by The Times and others, a recent appraisal commissioned by ACG valued the museum’s art assets at $8.1 billion, meaning that, at best, they’re offering Detroit less than 50 cents on the dollar vis-à-vis their collateral.
This fact not only guarantees to me that ACG believes they can overcome any possible stigma from a foreclosure situation to sell the DIA’s artwork at a serious premium. It also suggests to me that they already have at least one existing offer standing just off camera.
Whether this shadow bid comes from the Middle East, the BRICs, or somewhere else, I have no idea. I just know that either A) $3 to $4 billion goes beyond the limits of a bet that a boutique fund makes on speculation alone, or B) ACG’s decision-makers actually roll around New York on balls the diameter of monster truck tires.
For all these reasons, I’m doing everything short of a Santeria ritual in hopes that Detroit’s creditors fail to pressure the city’s stewards into accepting ACG’s latest loan offer. Because every brain cell and every gut instinct I have suggests the firm plans to win this trade going away. Combine their opportunism with the difficulties and dysfunctions that have bewitched the city’s management for so many years, and I’d be extremely pessimistic about Detroit’s prospects for keeping its greatest art inside the city limits where it belongs.