ICBC contributes to a $325 million USD syndicated loan for the 1334 York Avenue Refinancing Project

Project narrative

On July 1, 2015, a two-bank syndicate — the New York Branch of the Industrial and Commercial Bank of China (ICBC) and HSBC Bank USA, N.A. — entered into a $325,000,000.00 USD syndicated loan agreement with 1334 York, LLC — a Delaware-incorporated special purpose vehicle (SPV) and a subsidiary of Sotheby’s, a Delaware-incorporated multinational auctioneer and broker of art, jewelry, and collectibles — for the 1334 York Avenue Refinancing Project. This loan carried a maturity period of seven years, a final maturity date of July 1, 2022, and 1-month LIBOR plus a margin of 2.25%. The loan had a 25-year mortgage-style amortization schedule. This loan was secured by (i.e. collateralized against) a mortgage on the land and building located at 1334 York Avenue (specifically, and a security interest in its right, title, and interest in the net proceeds deficiency if any after a casualty or condemnation, a deposit of funds meant to cover the payment of property taxes, a deposit meant to cover the payment of insurance premiums, and assignments of interest rate protection agreements among 1334 York and HSBC Bank USA, a first priority continuing security interest in a non-interest‑bearing deposit account (lockbox account) in the name of 1334 York, LLC at HSBC Bank USA, the cash management account, the debt service reserve account, and the excess cash flow account, any and all amounts invested in permitted investments, all interest, dividends, cash, instruments, investment property, and other property, and a security interest in an environmental indemnity agreement dated July 1, 2015 as charged by 1334 York, LLC. Sotheby’s issued a unconditional guarantee for the payment and performance of this loan via a Guaranty of Recourse Carveouts agreement dated July 1, 2015. HSBC Bank USA served as administrative agent. The loan included the following financial covenants: at the payment date in July 2020, the loan-to-value (LTV) ratio could not exceed 65% based on the then-outstanding principal balance of the loan, though if the ratio exceed the maximum, the borrower could, at its option, post cash or a letter of credit or pay down the loan without any prepayment penalty or premium so that it would not exceed the LTV; the debt yield could not be less than 8.5%, and though if it was, the borrower had the option to post cash or a letter of credit or prepay the loan without any prepayment penalty or premium to allow it to achieve the minimum debt yield; the loan agreement contained a cash sweep if Sotheby’s corporate credit rating from Standard & Poor’s Rating Services was downgraded to “BB-”, a requirement to deposit a certain amount of debt service reserves if the rating was downgraded to “B+” or “B”, and a pay down of the loan such that the LTV ratio was at most 65% if the rating was downgraded to lower than “B”; and Sotheby’s had to, subject to the cure period, maintain a net worth of at least $425 million USD, tested annually, with 60 days after notice from the agent to cure such default if it did not. The loan included events of default (with customary grace periods), including nonpayment of fees or other amounts when due; violations of covenants; inaccuracies of representations and warranties; cross-defaults; material misstatements, insolvency proceedings; sale or transfer of 1334 York Avenue or equity interests in 1334 York, LLC not permitted by the loan documents or consented to by agent; modification of the master lease or the master lease guaranty; and acceleration by the lenders of Sotheby’s current line of credit with General Electric Capital Corporation. The borrower entered into interest rate protection agreements with HSBC Bank USA as counterparty and secured by the Property, consisting of a 2-year swap and a 5-year collar, both of which had a notional amount equal to the loan and its scheduled amortization, which effectively hedged the LIBOR Rate on the entire outstanding principal balance of the loan at a rate equal to 0.877% per annum for the first 2 years and no more than 3.75% per annum for the remainder of the term, making the interest rate for the first two years of the loan approximately 3.13% and no more than 6% for the remainder of the term. The proceeds were to be used by the borrower to refinance an existing loan with an outstanding principal balance of approximately $220 million USD on 1334 York Avenue, Manhattan, New York City, New York, a building which hosted Sotheby's sole North American auction salesroom, its principal North American exhibition space, the U.S. operations of its finance segment, and its corporate offices and headquarters; after payment of the existing loan in-full and all closing costs, reserves, and expenses, the borrower received cash of approximately $98 million USD, which was permitted to use for working capital requirements of the property, if any. On June 21, 2017, the lending syndicate — still including ICBC and HSBC Bank USA, but now with ING Capital LLC, Raymond James Bank, N.A., TIAA-CREF Trust Company, FSB, Aozora Bank, Ltd., and MidFirst Bank as lenders — entered into an amendment agreement with the borrower for the loan agreement and Guaranty of Recourse Carveouts; in the amendment, the financial covenants were modified so that the amount of net worth that Sotheby’s was required to maintain was been reduced from $425 million USD to $325 million USD. Furthermore, the borrower planned to prepay $32 million USD of the loan on July 3, 2017, consisting of $25 million USD from its current cash balances and $7 million USD from the cash management account, with annual prepayments planned each July from any excess cash flow that may be in the cash management account.