NEW YORK, May 5 (Reuters) - Standard & Poor's on Tuesday cut its ratings on auctioneer Sotheby's (BID.N: Quote, Profile, Research) three notches into speculative or "junk" status and said the company is likely to break a covenant shortly unless it revises terms on its borrowing, citing a sharp fall in the global art market.

The agency cut Sotheby's corporate credit rating to BB-minus from BBB-minus and said the outlook is negative, meaning it could downgrade it again within 12 to 18 months.

It cut the company's senior unsecured notes five notches into junk and assigned them a recovery rating of 6, indicating a zero to 10 percent of recovery in the event of a default.

The move reflects "what in our view has been a severe decline in company performance due to the greatly reduced art auction market, our expectation that business will remain depressed throughout 2009, a substantial increase in debt leverage, and our projection that, absent an amendment or other relief, Sotheby's is likely to breach a financial covenant in the near term," analyst David Kuntz said in a statement.

Sotheby's last week said it was cutting its annual dividend rate by two-thirds and announced another round of jobs cuts. The company has been struggling with the steep decline in global demand for art, forcing it to vacate premises, reduce sales in certain markets and find other ways to rein in expenses. For more see [ID:nBNG457171].

S&P is expecting revenues to fall sharply in the near term and for operating margins to be squeezed even as the company moves to cut costs.

The negative outlook reflects not just the poor economic outlook but also the fact that any covenant relief would hurt the company's financial flexibility, said Kuntz. (Reporting by Ciara Linnane; Editing by James Dalgleish)