Morningstar DBRS Finalized its Provisional Credit Ratings on Sotheby’s ArtFi Master Trust, Series 2024-1

DBRS, Inc. (Morningstar DBRS) finalized its provisional credit ratings on the following classes of notes to be issued by Sotheby's ArtFi Master Trust, Series 2024-1 (Series 2024-1 or the Issuer):

-- $453,300,000 Class A-1 Notes at AAA (sf)
-- $100,000,000 Class A-2 Notes at AAA (sf)
-- $54,300,000 Class B Notes at AA (sf)
-- $32,200,000 Class C Notes at A (sf)
-- $60,200,000 Class D Notes at BBB (sf)

CREDIT RATING RATIONALE/DESCRIPTION
The credit ratings are based on Morningstar DBRS' review of the following analytical considerations:

Transaction capital structure, proposed credit ratings, and form and sufficiency of available credit enhancement.
-- Credit enhancement in the form of subordination, overcollateralization, reserve account, and excess spread.
-- Credit enhancement levels sufficient to support the Morningstar DBRS-assumed loss assumptions under various stress scenarios.

The ability of the transaction to withstand stressed cash flow assumptions and repay investors according to the terms under which they have invested. For this transaction, the credit ratings address the timely payment of interest and the ultimate payment of principal, by the Series Scheduled Maturity Date.
-- The transaction will have an approximately two-year revolving period where no principal will be paid to or accumulated for the benefit of any class of the Series 2024-1 Notes. Following the end of the revolving period on February 28, 2026, or the occurrence of an Early Amortization Event, collections will be applied to pay down principal on the Notes.
-- The Morningstar DBRS baseline probability of default (PD) assumption of 5.25% incorporates a negative selection bias of the historical vintage data.
-- The stressed gross default hurdles were derived using the custom PD assumption in the Morningstar DBRS CLO Insight model with conservative correlation assumptions.
-- Pool composition assumed maximum obligor concentrations.
-- Recovery rate assumptions were based on historical experience of the Sotheby's Financial Services, Inc. (SFS or the Company) loan portfolio and Sotheby's past auction realizations.
-- Various interest rate scenarios were run with both up and down rate stresses applied.
-- Morningstar DBRS gave no credit to excess spread, which was assumed to be 0.00% in its cash flow scenarios.

The transaction parties' capabilities with regard to originations, underwriting, and servicing.
-- Morningstar DBRS performed an operational review of SFS and considers the Company to be an acceptable originator and servicer of Art Equity Loans and Consignor Advances related to fine art and collectibles assets.
-- The SFS team has significant experience in the art lending space combined with Sotheby's history and position as a marketplace for fine art and collectibles. Sotheby's hosts more than 500 auctions annually with a global network that encompasses 80 offices across 40 countries and 70 departments.

Credit quality of the collateral and the historical performance of SFS' loan portfolio.
-- Collateral must be a work of art or collectible item (such as fine art, design furniture, books, jewelry, watches, wine, or other spirits) that Sotheby's or its affiliated auction entities would offer for sale at auction, a private sale, or via its online marketplace. SFS does not originate loans secured by a non-fungible token or other similar digital artwork that does not exist in tangible form.
-- All collateral is senior-secured with a first-priority, perfected security interest.

The transaction incorporates both collateral performance triggers and portfolio concentration limits that will be expected to protect the noteholders in a stressed environment.
-- Early amortization triggers at the trust and series level include performance related to delinquencies, hammer-to-value auction realizations, and excess spread.
-- Concentration limits at the loan level for the underlying borrowers, loan type, and loan-to-value ratio.
-- Weighted-average loan-to-value limit of 60.0%.
--Concentration limits on the underlying collateral based on individual artist and collateral valuations.

The transaction assumptions consider Morningstar DBRS' baseline macroeconomic scenarios for rated sovereign economies, available in its commentary "Baseline Macroeconomic Scenarios for Rated Sovereigns March 2024 Update," published on March 27, 2024. These baseline macroeconomic scenarios replace Morningstar DBRS' moderate and adverse COVID-19 pandemic scenarios, which were first published in April 2020.

The legal structure and presence of legal opinions that address that the Issuer has a valid first-priority security interest and consistency with Morningstar DBRS' "Legal Criteria for U.S. Structured Finance."

Morningstar DBRS' credit ratings on the Class A-1 Notes, Class A-2 Notes, Class B Notes, Class C Notes, and Class D Notes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations for each of the rated notes are the related Accrued Note Interest and the related Note Balance.

Morningstar DBRS' credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations. For example, the associated contractual payment obligation that is not a financial obligation is the interest on unpaid Accrued Note Interest for each of the rated notes.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology applicable to the credit ratings is Rating U.S. Structured Finance Transactions (April 15, 2024),
https://dbrs.morningstar.com/research/431204

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS, Inc.
140 Broadway, 43rd Floor
New York, NY 10005 USA
Tel. +1 212 806-3277

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- Operational Risk Assessment for U.S. ABS Servicers (March 21, 2024), https://dbrs.morningstar.com/research/430003
-- Operational Risk Assessment for U.S. ABS Originators (March 21, 2024), https://dbrs.morningstar.com/research/430004
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- Global Methodology for Rating CLOs and Corporate CDOs and the CLO Insight Model version 1.0.1.0 (February 23, 2024), https://dbrs.morningstar.com/research/428544

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.