Debt | 9 Months Ended |
Sep. 30, 2013 |
Debt Instruments [Abstract] | ' |
Debt | ' |
Debt |
Revolving Credit Facility—On August 31, 2009, Sotheby's and certain of its wholly-owned subsidiaries entered into a credit agreement (the “Credit Agreement”) with an international syndicate of lenders led by General Electric Capital, Corporate Finance (“GE Capital”). On December 19, 2012, Sotheby's, GE Capital, and the lenders named therein amended and restated the Credit Agreement (the “A&R Credit Agreement”) to, among other things, extend the maturity date from September 1, 2014 to December 19, 2017, increase the borrowing capacity from $200 million to $300 million, and provide further flexibility to Sotheby's. On June 27, 2013, the A&R Credit Agreement was amended to increase the maximum permissible amount of net outstanding auction guarantees (i.e., auction guarantees less the impact of related risk and reward sharing arrangements) from $100 million to $300 million. The following summary does not purport to be a complete summary of the A&R Credit Agreement, and is qualified in its entirety by reference to the A&R Credit Agreement, a copy of which was filed as Exhibit 10.1 to the Form 8-K that was filed by Sotheby's with the Securities and Exchange Commission on December 20, 2012. Capitalized terms used, but not defined, in this summary have the meanings set forth in the A&R Credit Agreement. |
The A&R Credit Agreement provides for a $300 million revolving credit facility (the “Revolving Credit Facility”), with a sub-limit of $100 million for borrowings in the U.K. and Hong Kong, and has a feature whereby any time until June 19, 2017, Sotheby's may request, subject to Lenders' approval, to increase the borrowing capacity by an amount not to exceed $50 million. The amount of borrowings available under the Revolving Credit Facility is limited by a borrowing base which is determined with reference to the levels of Sotheby's loan portfolio, art inventory balances, and Net Tangible Assets. In addition, up to $20 million of the borrowing capacity of the Revolving Credit Facility may be used to issue letters of credit. As of September 30, 2013, no Revolving Credit Facility borrowings were outstanding and the amount of borrowings available under the Revolving Credit Facility was approximately $300 million, as calculated under the borrowing base. Sotheby's has not borrowed or issued any letters of credit under the Revolving Credit Facility since its inception. |
Borrowings under the Revolving Credit Facility are available in either U.S. Dollars, Pounds Sterling, or Hong Kong Dollars. The U.S. Borrowers and, subject to certain limitations, the U.K. Borrowers and Sotheby's Hong Kong, are jointly and severally liable for all obligations under the A&R Credit Agreement. In addition, certain subsidiaries of the Borrowers guarantee the obligations of the Borrowers under the A&R Credit Agreement. Sotheby's obligations under the A&R Credit Agreement are secured by liens on all or substantially all of the personal property of the Borrowers and the Guarantors. |
The A&R Credit Agreement contains certain customary affirmative and negative covenants including, but not limited to, limitations on capital expenditures, a $300 million limitation on net outstanding auction guarantees (i.e., auction guarantees less the impact of related risk and reward sharing arrangements) and limitations on the use of proceeds from borrowings under the A&R Credit Agreement. However, the A&R Credit Agreement does not limit dividend payments and Common Stock repurchases provided that: (i) there are no Events of Default, (ii) the Aggregate Borrowing Availability equals or exceeds $100 million, and (iii) the Total Liquidity Amount equals or exceeds $150 million. |
The A&R Credit Agreement also contains certain financial covenants, which are only applicable during certain defined compliance periods. These financial covenants were not applicable for the twelve month period ended September 30, 2013. |
Since August 31, 2009, Sotheby’s has paid approximately $13 million in life-to-date arrangement and amendment fees related to the Credit Agreement and the A&R Credit Agreement. These fees are being amortized on a straight-line basis to Interest Expense over the term of the facility. Additionally, Sotheby's is charged commitment fees ranging from 0.375% to 0.5% per year for undrawn amounts committed under the Revolving Credit Facility depending upon the level of borrowings. The commitment fee under the A&R Credit Agreement is currently 0.5%. |
Long-Term Debt—As of September 30, 2013, December 31, 2012, and September 30, 2012, Long-Term Debt consisted of the following (in thousands of dollars): |
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| | September 30, | | December 31, | | September 30, | | | | |
2013 | 2012 | 2012 | | | | |
York Property Mortgage, net of unamortized discount of $6,237, $8,911, and $9,802 | | $ | 218,732 | | | $ | 218,375 | | | $ | 218,576 | | | | | |
| | | |
2022 Senior Notes | | 300,000 | | | 300,000 | | | 300,000 | | | | | |
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Convertible Notes, net of unamortized discount of $0, $3,796, and $5,800 | | — | | | 178,072 | | | 176,068 | | | | | |
| | | |
2015 Senior Notes, net of unamortized discount of $0, $0, and $639 | | — | | | — | | | 79,332 | | | | | |
| | | |
Less current portion: | | | | | | | | | | |
York Property Mortgage | | (3,581 | ) | | (3,178 | ) | | (3,391 | ) | | | | |
2015 Senior Notes | | — | | | — | | | (79,332 | ) | | | | |
| | | |
Convertible Notes | | — | | | (178,072 | ) | | (176,068 | ) | | | | |
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Total | | $ | 515,151 | | | $ | 515,197 | | | $ | 515,185 | | | | | |
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(See the captioned sections below for detailed information related to the York Property Mortgage, the 2022 Senior Notes, the 2015 Senior Notes, and the Convertible Notes.) |
York Property Mortgage—On February 6, 2009, Sotheby's purchased the land and building located at 1334 York Avenue, New York, New York (the “York Property”) from RFR Holding Corp. (“RFR”) for a purchase price of $370 million. The York Property is home to Sotheby's sole North American auction salesroom and principal North American exhibition space, including S|2, Sotheby's private sale exhibition gallery. The York Property is also home to Sotheby's U.S. Dealer and Finance operations, as well as its corporate offices. |
Sotheby's financed the $370 million purchase price through an initial $50 million cash payment made in conjunction with the signing of the related purchase and sale agreement on January 11, 2008, an $85 million cash payment made when the purchase was consummated on February 6, 2009, and the assumption of an existing $235 million mortgage on the York Property. |
The York Property Mortgage matures on July 1, 2035, but has an optional pre-payment date of July 1, 2015 and bears an annual rate of interest of approximately 5.6%, which increases subsequent to July 1, 2015 unless the mortgage is paid in-full by that date. In conjunction with the final accounting for the York Property purchase in February 2009, the York Property Mortgage was recorded on Sotheby's balance sheet at its $212.1 million fair value. The resulting $22.9 million debt discount is being amortized to Interest Expense over the remaining expected term of the loan through July 2015. Sotheby's paid fees of $2.4 million in conjunction with the assumption of the York Property Mortgage, which are also being amortized to Interest Expense through July 2015. As of September 30, 2013, the fair value of the York Property Mortgage was approximately $228 million based on a present value calculation utilizing an interest rate obtained from a third party source. As such, this fair value measurement is considered to be a Level 3 fair value measurement in the fair value hierarchy as per Accounting Standards Codification 820, Fair Value Measurements ("ASC 820"). |
The York Property and the York Property Mortgage are held by 1334 York, LLC, a separate legal entity of Sotheby's that maintains its own books and records and whose results are ultimately consolidated into Sotheby's financial statements. The assets of 1334 York, LLC are not available to satisfy the obligations of other Sotheby's affiliates or any other entity. |
2022 Senior Notes—On September 27, 2012, Sotheby’s issued $300 million aggregate principal amount of 5.25% Senior Notes, due October 1, 2022. The 2022 Senior Notes were offered only to qualified institutional buyers in accordance with Rule 144A and to non-U.S. Persons under Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). Holders of the 2022 Senior Notes do not have registration rights, and the 2022 Senior Notes have not been and will not be registered under the Securities Act. |
The net proceeds from the issuance of the 2022 Senior Notes were approximately $293.7 million, after deducting fees paid to the initial purchasers, and were principally used to retire the 2015 Senior Notes and the Convertible Notes, as discussed below. |
The 2022 Senior Notes are guaranteed, jointly and severally, on a senior unsecured basis by certain of Sotheby's existing and future domestic subsidiaries to the extent and on the same basis that such subsidiaries guarantee borrowings under the A&R Credit Agreement. Interest on the 2022 Senior Notes is payable semi-annually in cash on April 1 and October 1 of each year. |
The 2022 Senior Notes are redeemable by Sotheby's, in whole or in part, on or after October 1, 2017, at specified redemption prices set forth in the underlying indenture, plus accrued and unpaid interest to, but excluding, the redemption date. Prior to October 1, 2017, the 2022 Senior Notes are redeemable, in whole or in part, at a redemption price equal to 100% of the principal amount to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date, plus a premium equal to the greater of 1% of the principal amount of the 2022 Senior Notes and a make-whole premium (as defined in the underlying indenture). |
In addition, at any time prior to October 1, 2015, Sotheby's may redeem up to 35% of the aggregate principal amount of the 2022 Senior Notes with the net cash proceeds of certain equity offerings at the redemption price of 105.25% plus accrued and unpaid interest. The 2022 Senior Notes are not callable by holders unless Sotheby's is in default under the terms of the underlying indenture. |
As of September 30, 2013, the $300 million principal amount of 2022 Senior Notes had a fair value of approximately $281 million based on a broker quoted price derived via a pricing model using observable and unobservable inputs. As such, this fair value measurement is considered to be a Level 3 fair value measurement in the fair value hierarchy as per ASC 820. |
2015 Senior Notes—On June 17, 2008, Sotheby's issued $150 million aggregate principal amount of 7.75% Senior Notes, due June 15, 2015. The net proceeds from the issuance of the 2015 Senior Notes were approximately $145.9 million, after deducting the initial purchasers' discounts and fees. The 2015 Senior Notes had an effective interest rate of 8%. |
On November 23, 2012, Sotheby's redeemed all of the remaining $80 million of outstanding 2015 Senior Notes for a redemption price of $97 million, which includes a redemption premium of $14 million and accrued interest of $2.7 million. The redemption of the 2015 Senior Notes resulted in a $15 million loss recognized in the fourth quarter of 2012, which included the write-off of approximately $1 million in unamortized debt issuance costs and discounts. |
Convertible Notes—On June 17, 2008, Sotheby's issued $200 million aggregate principal amount of 3.125% Convertible Notes (the "Convertible Notes"). The net proceeds from the issuance of the Convertible Notes were approximately $194.3 million, after deducting transaction costs. Prior to March 15, 2013, the Convertible Notes were convertible under certain circumstances and were payable in cash, shares of Sotheby's Common Stock, or a combination thereof, at the option of Sotheby's, based on a conversion rate, as adjusted, of 29.5920 shares of Common Stock per $1,000 principal amount of Convertible Notes, which was equal to a conversion price, as adjusted, of approximately $33.79 per share. The Convertible Notes became convertible on March 15, 2013, for a period ending on the close of business on June 14, 2013, when Sotheby's became obligated to pay the conversion obligation of $197.4 million, consisting of $181.9 million related to principal and $15.5 million related to the conversion premium. In June 2013, the Conversion Obligation was settled entirely in cash and Sotheby's simultaneously received $15.5 million in cash to offset the conversion premium through the exercise of its Convertible Note Hedges, as discussed below. |
Convertible Note Hedges and Warrant Transactions —On June 11, 2008, in conjunction with the issuance of the Convertible Notes, Sotheby's entered into convertible note hedge transactions (the “Convertible Note Hedges”) at a cost of $40.6 million that allowed Sotheby's to purchase its Common Stock from affiliates of Bank of America and Goldman Sachs & Co. (collectively, the “Counterparties”) at a price equal to the conversion price of the Convertible Notes. The Convertible Note Hedges were entered into to offset the impact of any premium paid, either in cash or in shares of Sotheby's Common Stock, upon the settlement of the Convertible Notes. As previously discussed, in June 2013, Sotheby's settled the conversion obligation related to the Convertible Notes entirely in cash. As a result, the Convertible Note Hedges were exercised, and Sotheby's received $15.5 million in cash to offset the conversion premium related to the Convertible Notes. |
On June 11, 2008, Sotheby's also entered into warrant transactions, whereby it sold to the Counterparties warrants (the “Warrants”) to acquire, subject to customary anti-dilution adjustments, approximately 5.9 million shares of Sotheby's Common Stock at a price of approximately $44.50 per share, as adjusted. The net proceeds received by Sotheby's in June 2008 from the sale of the Warrants was $22.3 million and is recorded as a component of Additional Paid In Capital within Shareholders' Equity. The Warrants are automatically exercisable subject to a limit of approximately 118,348 Warrants per day for each day in the 50 trading days that began on September 17, 2013 and will end on November 25, 2013 (the "Trading Period"). If, on a particular day during the Trading Period, the daily limit of approximately 118,348 Warrants is not exercised, such Warrants up to the daily limit will expire. As of October 28, 2013, the settlement of Warrant exercises has resulted in the issuance of approximately 387,000 shares of Sotheby's Common Stock in the fourth quarter of 2013. |
Future Principal and Interest Payments—The aggregate future principal and interest payments due by Sotheby's related to its Long-Term Debt during the five-year period after the September 30, 2013 balance sheet date are as follows (in thousands of dollars): |
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October 2013 to September 2014 | $ | 31,754 | | | | | | | | | | | | | | |
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October 2014 to September 2015 | $ | 247,269 | | | | | | | | | | | | | | |
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October 2015 to September 2016 | $ | 15,750 | | | | | | | | | | | | | | |
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October 2016 to September 2017 | $ | 15,750 | | | | | | | | | | | | | | |
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October 2017 to September 2018 | $ | 15,750 | | | | | | | | | | | | | | |
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The York Property Mortgage matures on July 1, 2035, but has an optional pre-payment date of July 1, 2015 and bears an annual rate of interest of approximately 5.6%, which increases subsequent to July 1, 2015 unless the mortgage is paid in-full by that date. |
Interest Expense—For the three and nine months ended September 30, 2013 and 2012, Interest Expense consists of the following (in thousands of dollars): |
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| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| |
| | 2013 | | 2012 | | 2013 | | 2012 |
Revolving credit facility: | | | | | | | | |
Amortization of amendment and arrangement fees | | $ | 319 | | | $ | 430 | | | $ | 946 | | | $ | 1,289 | |
|
Commitment fees | | 383 | | | 316 | | | 1,145 | | | 944 | |
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Sub-total | | 702 | | | 746 | | | 2,091 | | | 2,233 | |
|
York Property Mortgage | | 4,148 | | | 4,194 | | | 12,376 | | | 12,586 | |
|
2022 Senior Notes and 2015 Senior Notes | | 3,938 | | | 1,761 | | | 11,813 | | | 4,936 | |
|
Convertible Notes | | — | | | 3,386 | | | 6,417 | | | 10,045 | |
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Other interest expense | | 124 | | | 303 | | | 867 | | | 882 | |
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Total Interest Expense | | $ | 8,912 | | | $ | 10,390 | | | $ | 33,564 | | | $ | 30,682 | |
|
Other interest expense consists primarily of the amortization of debt issuance costs related to the 2022 Senior Notes, 2015 Senior Notes, and the Convertible Notes. |
For the three and nine months ended September 30, 2013 and 2012, Interest Expense related to the Convertible Notes consisted of the following (in thousands of dollars): |
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| | Three Months Ended September 30, | | Nine Months Ended |
September 30, |
| | 2013 | | 2012 | 2013 | | 2012 |
Contractual coupon interest expense | | $ | — | | | $ | 1,421 | | | $ | 2,621 | | | $ | 4,262 | |
|
Discount amortization | | — | | | 1,965 | | | 3,796 | | | 5,783 | |
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Total | | $ | — | | | $ | 3,386 | | | $ | 6,417 | | | $ | 10,045 | |
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