What are you seeing in terms of real estate values and the size (and types) of winery construction projects happening?
JASON HINDE (JH), EXCHANGE BANK: Real estate values in general have been increasing across the board. From our vantage point, we see wineries continue to buy vineyards to control more of their grape supply as well as both local and out-of-the-area investors buying up vineyards of all sizes. Generally speaking, the sales prices I’ve seen for vineyard land have a reasonable correlation to the price of grapes the subject vineyard produces, which is a good thing! I would have concerns if grape prices were flat and values were briskly increasing.

ADAM BEAK (AB), BANK OF THE WEST: Real estate values continue to increase—particularly in Napa, where values are up 14% year-over-year, with positive increases across the entire North Coast.

In terms of the size and types of projects, there’s been a lot of variety: larger projects (with regard to production) as well as mid-sized, smaller and vertically integrated projects. On the financing front, we’re seeing everything from M&A work to production to vineyard re-plantings to tasting rooms and visiting centers. The whole industry is moving in a positive direction, at least in the premium regions.

MARK BRODY (MB), UMPQUA BANK: Real estate values seem to be, broadly speaking, at their peak. Napa vineyard prices are being driven by real and perceived scarcity, particularly at the high-quality end of the spectrum. The M&A market has been robust, and this also fuels the perception of solid value. Ample credit is available for construction—whether new or expansion and for vineyard development.

WILLIAM BISHOP (WB), BMO HARRIS BANK: Given the overall general health of the industry and historically low and expected future low interest rates, financially strong wineries are looking to consolidate through acquisitions, expand vineyard acquisitions to better secure longer term sourcing of supply and be more creative as well as environmentally friendly in their business. We are seeing new wineries—or expansion of current footprints—being built with more expensive LEED certification qualifications, a small move into organic wines and overall up-scaled tasting rooms and high-end construction materials.

All of the above are contributing to higher level investment by the industry as well as maintaining and expanding pressure on real estate values. The large supply from the 2012, 2013 and 2014 harvests are beginning to become depleted. Many wineries, due to consumer taste and readily available supply, expanded and created new “red blends” that may come under pressure with smaller recent harvests. This scenario is causing real estate prices to rise not only in the core (California) regions such as Napa and Sonoma but also in Lodi, Lake County and other regions. Napa continues to experience the highest average vineyard prices, with average prices in the $300,000 per acre range.

What has happened to debt rates, terms and availability in the wine industry (wineries, vineyards, wine brands) in the past 12 months?
AB: The current environment remains highly competitive. Rates are at historic lows, and terms and credit spreads continue to be extremely attractive. For good quality borrowers, credit availability is high, terms are favorable and a lot of lenders are fighting hard to win their business.

JH: As many veteran wine industry lenders always see at the top of the market cycle, terms, rates and structure from lenders in the industry loosen up, rates get even more competitive and credit structure is relaxed.

Rates have been up and down over the past 12 months due to changes in the rate markets and the indexes most lenders base their loans upon. Many lenders base their rates on various Treasury indexes plus a spread; those Treasuries have been volatile. For instance, the 5 Year Treasury rate has ranged from 1% to 1.8% since December 2015, an 80bp (basis point) swing in the past six months. Debt is out there for nearly anyone looking for it right now.

MB: There’s a very high level of competitiveness among debt providers that have been involved for a while, and from new entrants. Willingness to lend, in terms of flexibility of structure and aggressiveness in pricing, are all at historic highs, particularly for quality operations. This indicates to me that we are nearing the end of the healthy cycle for the industry and some softening is on the horizon.

Rates are mostly stable, but in cases of highly desirable wine companies, pricing continues to go lower. Terms are also stable, but there are situations where institutions are being very aggressive; as a recent example, I’ve seen a 25-year fully amortizing vineyard loan at a rate that is in par with home loan rates.

WB: Short-term interest rates have been stable over the past 12 months, although as each quarterly Fed meeting approached, speculation abounds as to when the next interest rate hike would occur. We had expected a rate hike in June; however, a weak labor market report just ahead of the June Fed meeting poured water over any idea of a rate hike now. Prior to the recent Brexit vote, most economists were fairly certain that we would see a 0.25% hike in both September and December of 2016. It is now highly unlikely that the Fed will raise rates at either of these upcoming quarterly meetings, and many believe rates will be flat well into 2017.

As to mid- and long-term rates, the yield curve continues to flatten and long-term rates are at near historical lows. Although we do not predict much upward movement in rates for the foreseeable future, we are encouraging our clients to fix long-term financings through swaps, fixed rates, interest rate caps and other products to properly match the wine industry’s long-term capital investment structure.

Terms haven’t changed much from 2015, given the flat interest rate scenario. There is some small downward pricing pressure due to increased competition by banks and the general positive overall health of the wine sector, and there appears to be more than adequate credit available for the industry. Not only are current wine lenders relatively aggressive, but new lenders have entered the market in 2016 looking to take market share away from the established bank lending group.

How has the debt market for the wine industry been in the past year?
J H: Competitive.

WB: (The) debt market is active and competitive. As long as rates continue at these low rates, it allows and encourages wineries to expand facilities, build brands and consider acquisitions.

MB: Debt is definitely available for high-quality companies. Still, the market can be pretty chilly for wineries that have not been strong performers.

AB: The debt market has been strong and is getting stronger. The aggressive pricing that’s available makes this a very good time for borrowers.

How has the equity/investment/buyout market for the wine industry been in the past year?
MB: Sizzling. It is literally hard to keep track of all the recent transactions.

WB: We are seeing the roll up of the industry by the likes of Gallo, Constellation Brands and Chateau Ste. Michelle as well as others. In particular, the likes of Gallo and The Wine Group are up-tiering their portfolios with significantly higher priced brands versus their traditional portfolios. Also, “gap price” filling is active by several wineries as they attempt to build out a broader range of brand price points. The industry’s hot spot growth area today is in the $15-$25 range. Also, there continues to be somewhat expanded interest by non-strategic buyers (i.e. private equity firms). Acquisition multiples remain quite high, so for a private equity firm to invest, they must accept a potential lower near-term return with capital appreciation over time.

The likes of Gallo, Kendall-Jackson, Chateau Ste. Michelle and others have been active in securing supply through vineyard acquisitions as Cabernet Sauvignon—and supply of certain other varietals—are becoming very tight.

JH: Anyone who has picked up a newspaper knows that the M&A guys are having a great year. What hasn’t been discussed in more detail—and from what was shared at the North Bay Business Journal’s Wine Industry Conference in March—is the amount of wineries wanting to sell, but so far have not been able to sell. One panelist mentioned that he has anywhere from 10-15 deals a month come across his desk; he may look closely at one or two of them, at most. I believe there are a lot of winery owners in the baby boomer demographic looking to sell their wineries, and there are very few buyers for smaller wineries. Most of the headline-grabbing M&A deals has been for larger wineries being bought up by even larger ones.

AB: The equity/investment/buyout market remains extremely strong. There’s a lot of capital out there and a lot of interest in the U.S. wine business—from both U.S.-based and international strategics. I just returned from meeting with my colleagues in France and Italy, as well as a number of large European wine and beverage players. They’re all looking to increase their exposure to the U.S. market, and several things are driving that interest. For one, the U.S. is the largest wine-consuming nation on earth, with low per-capita consumption rates and room to grow. What’s more, by global measures, the U.S. economy is doing quite well. The premiumization trend in the U.S. wine market also makes it very attractive for both international and U.S.-based companies.

Between the market dynamics and the debt dynamics, this is as good a time as we’ve ever seen.
Have any players changed (banks, financiers, private equity, etc.)?
JH: I don’t think there have been as many new lenders to the wine industry as we’ve seen in previous “up” cycles, only a couple come to mind. We have many regular lenders that are active all the time as well as the fair-weather lenders that typically lend in the up cycles.

AB: The existing players are as engaged as ever, and more are coming in. We’re definitely seeing more banks in the arena, and private equity continues to be extremely interested. It’s a highly attractive market for capital.

MB: We have seen some very aggressive moves by newer banks to the wine space offering aggressive structure and pricing.

WB: There have basically been no banks exiting the sector in 2015-16, and in fact some new entrants along with a couple of banks that previously were perimeter players and have now expanded their staff and wine portfolios. As mentioned elsewhere, private equity firms continue to show desire to participate in the roll up of the industry but discover returns are of a long-term nature and potentially beyond their three- to five-year flip scenario mindset.

Have there been any trends in deal size?
WB: Deal size is dependent on size of wineries for sale. That said, by far the largest transaction that will occur in 2016 is the distributor merger of Southern Wine & Spirits and Glazer’s. This combination of the top two wine and spirits distributors will have significant impact on the industry. In general it should create greater efficiencies for all distribution and enhance wineries’ capabilities on a go-to-market basis. Some smaller wineries and/or wineries without distinctive brands may be more challenged for support from the consolidated distribution system but also may need to look to direct sales options and expanded wine clubs.

AB: There’s been a lot of activity and interest across the board, but not every deal is getting done. A deal has to make sense for the buyer, so we’ve seen a number of big deals over the past year. Bigger buyers have a lot of capital and a need to grow, so they’re pursuing acquisitions that make sense in terms of their ability to take an asset and make it worth more under their tutelage.

JH: We have not seen any trends in deal sizes, we see very small to quite large wineries and vineyard owners needing capital or refinancing.

We’ve also seen several smaller deals that may not make as much sense. The math for big players doing big deals is relatively straightforward, but for small players, the math gets harder. Smaller deals often face an uphill battle, and they have to really work within whatever structure the buyer is able to bring.

MB: I have not noted any particular trends.

How might the Brexit impact U.S. wine industry finance?
JH: Brexit is no doubt a significant event, but I think what most peop le don’t know is that it will take years for Great Britain to decouple itself from the EU. I don’t think we’ll see any effects for our local wine industry nor wine industry lenders anytime soon.

MB: Short-term consequences are not material as exports in general, and exports to Britain specifically are not a big factor in the premium end of the business today. To the extent that Brexit causes uncertainty and volatility in global markets, this could have a dampening impact on California producers trying to establish new export markets.

Obviously, to the extent that the global economic confidence that is eroded as a result of Brexit winds up triggering, hastening and/or exacerbating a global recession, that would impact the industry materially. That said, most seem to feel that some downturn is on the horizon.

WB: The recent Brexit vote, needless to say, has had a material impact on the U.S. and world’s stock markets and currencies. The main concern I see for the near and potentially longer term is the risk of less U.S. wine imports by the UK, as the devaluation of the British pound will cause European wines to become more price acceptable. It will take at least two years plus to implement the exit by the UK from the EU, so EU wines will continue to have a price advantage over U.S. wines until and if higher trade tariffs, restrictions are implemented between the UK and the EU.

Any closing thoughts or concerns?
JH: I personally think 2016 will be a choppy year on a macroeconomic front with anemic economic growth. The industry will continue forward until consumer buying habits change, which is really what drives our industry.

AB: Consolidation continues among all assets of the wine industry (i.e., distributors, producers and retail) and continues to be a major theme and seems to be picking up momentum in past 12 months—both at the producer level and at the three-tier distributor level.

Also, looking across the value chain, the euro exchange rate is leading a number of wine industry suppliers to seek opportunities for additional exposure to the U.S., whether through growing their sales organically or through acquisition.

MB: Beyond the expectation for a downturn at some point, the “roller coaster” of grape supply and market demand has created some dynamic situations. It is key that a given banker understand not just what is flowing through the income statement this year but what will happen when the wine from the very short 2015 harvest is sold.

WILLIAM BISHOP is the managing director of the San Francisco, Calif., office of BMO Harris Bank’s Food and Consumer Group. Bishop established the group’s West Coast office in 1998 to specialize in serving companies that produce wine and other commodities. Prior to joining BMO Harris Bank, Bishop spent nearly 25 years in domestic and international banking, focusing on the food and commodity sectors. He held senior positions at Credit Agricole (Calyon) and Rabobank International.

JASON HINDE is a vice president in Exchange Bank’s Wine Practice and has been supporting the wine and vineyard industries for nearly 15 years. Hinde started his banking career in the 1990s, lending to VC-backed startups in Silicon Valley before following his passion for wine to the North Bay. He worked in commercial lending at Mechanics Bank and Silicon Valley Bank—both in their North Bay wine-lending group and in their Silicon Valley technology-lending group.

MARK BRODY is a banking veteran of 30-plus years who currently oversees Umpqua Bank’s San Francisco Metro Market Commercial Banking Center and leads Umpqua’s Wine Specialty Group, which caters to the wine and vineyard industry. Brody has a broad banking background, including time spent at City National Bank, Sanwa Bank California and Bank of America. He was CEO and general manager of Cline Cellars from 2001 to 2003 and founder of the Wine Advisory Group.

ADAM BEAK is a managing director in Bank of the West’s Commercial Banking Group and head of the Wine & Beverage Group in Napa, Calif. At Bank of the West, Beak developed a wine and agricultural specialist team and increased a loan portfolio from $56 million to more than $1 billion. Beak served as COO/CFO for Heron Wines in San Francisco, Calif., before joining Bank of the West, and he is part owner of 4 Bears Winery in Napa.