September 2015 Issue of Wines & Vines

What Finance Insiders Think

An influential panel shares its views on trends, deals and interest rates

by Ben Narasin

We asked our panel of finance experts what’s been happening in the wine industry during the past year. Here’s what they had to say about:


How has the debt market for the wine industry been in the past year?

ADAM BEAK, BANK OF THE WEST: Strong and moving toward stronger. The strength of the wine business, along with the sex appeal that always seems to come along with it, has continued to bring in different parties.

MARK BRODY, UMPQUA BANK: Healthy with a high level of interest, and large wineries are performing well.

CHARLES DAY, RABOBANK: It seems that all lenders in the space have been seeing growth in their respective portfolios. Market growth is bringing in new players, and many existing borrowers have been adding debt to fund their growth.

JASON HINDE, EXCHANGE BANK: Great crop years and a rising tide of wine buying have put a lot of wind in everyone’s sails; life has been good! Debt is there for anyone in the wine industry to have.


    CHARLES DAY is a regional manager with Rabobank’s Agribusiness Division. Day is based in Santa Rosa, Calif., and is responsible for developing banking relationships in the North Bay, with a focus on wineries and vineyards. He has been a commercial lender for 24 years, with a dedicated focus on the wine industry for the past 17 years. Prior to Rabobank, Day worked in both commercial and corporate banking areas in Los Angeles and San Francisco, Calif.

    JASON HINDE is vice president and relationship manager with Exchange Bank’s Commercial Banking Group. Hinde held similar positions in commercial lending at Mechanics Bank, working with wineries, growers, business owners and real estate investors throughout the Bay Area. Prior to Mechanics, Hinde held similar positions in lending at Silicon Valley Bank—both in their North Bay wine-lending group and in their Silicon Valley technology-lending group.

    ADAM BEAK is senior vice president of Bank of the West and the managing director of the North Coast Agricultural Banking Center/ Premium Wine Group in Napa, Calif. Beak oversees all winery, vineyard and wine industry-related business for Bank of the West.

    MARK BRODY is a 30-plus-year banking veteran currently overseeing Umpqua Bank’s commercial-lending activities in the Bay Area. He is senior vice president and manager of Bay Area commercial banking at Umpqua Bank, where he leads the Wine Specialty Group. Brody was CEO and general manager of Cline Cellars in Sonoma, Calif., from 2001 to 2003 and founder of the Wine Advisory Group.

    ROB MCMILLAN is executive vice president and founder of Silicon Valley Bank’s Wine Division, based in St. Helena, Calif. McMillan manages a deal team and assists clients and bankers by sharing his views of the macro factors impacting the economy and the fine wine business in particular. McMillan is also the author of the bank’s annual “State of the Wine Industry Report” and speaks about the topic regularly.

    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, fresh fruits and vegetables, seafood and other foods and commodities. Prior to joining BMO Harris Bank, Bishop spent nearly 25 years in domestic and international banking, focusing on the food and commodity sectors, and held senior positions at Credit Agricole (Calyon) and Rabobank International.

What’s happening/happened with interest rates?

BEAK: Rates have been fairly stable, but we expect some movement upward in the long term. It’s a great time to lock in.

WILLIAM BISHOP, BMO HARRIS BANK: Although the Federal Reserve has constantly threatened upward interest rate movement over the past year, no significant action has occurred. Conflicting economic data has stalled any upside interest rate movement. Clearly there is a strong potential for a 0.25% raise in the second half of 2015. Although wineries with heavy debt loads would be impacted, a 0.25% rate increase would not be overly detrimental to the sector.

BRODY: For the best companies, rates continue to get better as intense competition exists for their business. The low interest rate environment also continues to be in the favor of borrowers irrespective of a given bank’s spread. It is hard to imagine that both short- and long-term rates won’t be higher five years from now.

DAY: Short-term rates haven’t changed, though the expectation for a Fed rate hike in fall 2015 seems to be the consensus by most traders following that market. The U.S. economy is probably picking up enough steam to allow the Fed to bump up rates, but the low inflation rate and international developments affecting global rates might combine to keep those increases minimal. Longer-term rates showed some volatility in the past 12 months, with a sharp decline in long-term U.S. Treasuries followed by a recent run up—but the net change from where we were a year ago is minimal.

ROB McMILLAN, SILICON VALLEY BANK: Long-term rates started at historic low levels and moved up about three-quarters of a point through the year. Short-term rates haven’t moved for years, but that’s expected to change toward the end of 2015. Competition for business has been strong for the past few years, and overall spreads have moved down over that time. There isn’t much room for thinner spreads at this stage. Overall rates remain at historic lows but look to rise slightly when the year is out.

HINDE: There are two components when speaking about rates; the first is what is happening in the short- and long-term rate markets such as Prime, LIBOR and Treasuries, and the second is how much are lenders charging above these various indexes.

To address the first, we have had historic low rates—even negative interest rates in Europe—since 2008. Short-term rates have remained at historic lows with no change, however the longer term rates have been bouncing around like a game of Pong. The 10-Year Treasury (Note) was down to 1.68% in January 2015, it is now in the 2.30% range—a 50+bp (basis point) swing within five months! The central bank has been rattling its sword of rate increases for some time, and it appears there will be a modest increase in 2015 to short- and long-term rates. Most reports I’ve read have the 10-Year Treasury around 3% by next summer (2016). Bottom line is that rates will increase, but hopefully gradually. I do not believe the Fed will allow rates to go up too high because of what it would do to the balance sheet of the U.S. government. The current average rate on all U.S. government debt is 2.2%, which costs us $500 billion a year in debt service. If rates increased to just 4%, interest costs alone would cross the $1 trillion mark, the results of which are hard to predict, but it would not be good.

The second half of the rate question is what are lenders charging over these indexes? We are well into this up cycle in the wine industry, and lenders are being competitive, which means thinner margins they charge to win the deal. While the indexes (Prime, LIBOR and Treasuries) already have or may increase as we enter the second half of 2015, the margin that lenders are charging for strong credits will continue to be squeezed and may offset some of the increase in the indexes. Top-rated borrowers will continue to have the negotiating power, as those are the most heavily competed for deals from what I see.

How about loan terms?

BEAK: Things have been fairly stable from a term perspective. Since the industry is doing well, we’re starting to see some new, inexperienced lenders come into the space again, and they’re starting to put some loan structures in place that are a bit more aggressive.

DAY: Terms are similar; the basic structure of most financing isn’t changing so much as the strong wine market is helping more borrowers qualify.

BRODY: One of the factors impacting loan structure is appraisal value. These are tough times for appraisers, as borrower expectations exist for higher and higher values based on grape prices, regulatory issues and perceptions of a hot marketplace. Higher risk elements in vineyards relative to water and labor could cause some permanent shifts in vineyard economics. Some “high-water” comps exist, but appraisers are being appropriately cautious relative to needing to see comps and see sustainable economics in the properties. Another trend in terms is more use of government guaranty programs in loan structures.

BISHOP: I have not seen significant changes in terms over the past year. There is, however, greater interest in fixed-rate term debt in anticipation of the eventual interest rate hike. Several of our clients have experienced improved financial results over the past year and thus have asked for less restrictive financial covenants as well as some reduction in pricing. I would expect this trend to continue in the near term, as the industry should hopefully benefit from three outstanding vintage years: 2012, 2013 and 2014.

HINDE: I haven’t seen terms materially change from a year ago, however I have seen lenders get more competitive by offering less structure (read: covenants).

How has the availability of credit or leniency of lenders changed during the period?

DAY: The credit market is very healthy. Qualified borrowers aren’t finding a lack of options for debt providers. More lenders are entering the space—creating more availability of credit—but even established lenders are increasing their focus on the industry, further adding to that availability.

BISHOP: Credit availability remains strong. There are numerous financially strong banks focused on the wine sector. There is credit availability for all levels of wine companies—from smaller boutique wineries with specialized credit needs to the more corporate-level, cash flow-driven, larger wine companies.

BEAK: Availability of credit continues to be strong, with multiple banks fighting it out for good quality credit.

McMILLAN: Credit is widely available. There is a lot of liquidity in financial markets begging for a return. Lenders who have demonstrated an inconsistency remaining committed to the wine business have all come back in, and a few new lenders have been added to the mix. Competition for credit is strong. Typically this activity is a leading indicator of an over-heated market, but it’s difficult to draw parallels from historic activity given the tumultuous world economy of the
past decade.


How has the equity/investment/buyout market for the wine industry been in the past year?

BEAK: We’re starting to see more private equity, more financial buyers and more wealthy folks that want to invest in high-end Napa. There’s been less activity across the publicly traded companies (i.e., Diageo, Treasury, etc.), though we think Constellation may become more active. Among the large, privately held companies (e.g., Gallo, Wine Group), we’ve seen activity as well.

BRODY: I think the availability of private equity is as high as I have ever seen it. Certainly some notable acquisitions have been made, but these deals tend to have a long gestation period. Sellers are expecting high multiples, and the smart buyers are making sure that EBITDA trends are sustainable and multiples have some basis in reality. There simply are not enough “high-roller” investors that fall in love with a property/brand and will pay any price.

DAY: The M&A (mergers and acquisitions) market is healthy. We’ve seen a number of deals across a fairly broad spectrum. Whereas the early years of the recovery really seemed to be large, healthy wineries focusing on vineyard acquisition to solidify sourcing, the focus has now expanded to brands and production facilities. There are some new buyers, but at the end of the day, the M&A market still seems to be defined by the bigger guys getting bigger. We are still seeing investment firms—both private equity and institutional—interested in the sector, but it’s not an industry that historically fits well with their investment parameters.

BISHOP: There have been a number of acquisitions, consolidations and expansion projects over the past year. Many have been by financially strong wineries, so credit has been readily available. However, there still remains opportunity for niche brands, creation of new brands and expanded crushing/processing capacity due to the large crops from the 2012, 2013 and 2014 vintages.

HINDE: There have been several interesting sales in 2015; I expect to see more sales in 2015. Domestic buyers wanting to expand, move into new price points, varietals or geography are buying more vineyards and wineries. With bond returns still extremely low, trouble in the European markets and uneasiness with stock market valuations, there is a lot of capital flight coming into the United States in addition to domestic capital looking for better risk-adjusted returns. Napa and Sonoma County vineyards and wineries have and will continue to attract some of this capital looking for a home. Generally speaking, these macro trends will potentially drive prices and cash flow multiples buyers are willing to pay higher than in previous years.

McMILLAN: M&A has continued at a torrid pace in the past few years due to:

• Evolution of wine from a cottage business to one with serious investment requirements and returns.

• Owners who started businesses in the past 20 years who need a transition in ownership.

• Trading up to higher priced wines has larger wine companies looking for investments.

• Low interest rates spurred the overall M&A and IPO markets.

• Growth has wineries seeking good acreage. Many are looking to Paso (Robles, Calif.), Oregon and Washington for production. Vineyards without homes are in high demand in the North Coast (of California).


Have any players (banks, financiers, private equity, etc.) changed?

DAY: There are new lenders taking baby steps in the market to test the waters, but they probably won’t last. It’s hard to bank the industry if you don’t have a dedicated team and understand the nuances of the many variables to the market—from harvest volumes to issues in the three-tier system. Some of the new entrants will inevitably make a few poorly structured deals, get burned, and then decide to exit. We will see a couple larger equity deals done with private equity firms, but those are going to be on the larger side, given the economics behind the private equity market.

BISHOP: Private-equity firms always show interest but sometimes become challenged when they analyze the capital investment and return models of the sector. There are always the one-off examples of PE firms looking for a trophy brand/property that may not be justifiable on a cash-flow basis but may in the long run have significant capital appreciation.

BEAK: There’s definitely been more interest in the space. There are some historically big banks that haven’t been in this business before wanting to get involved. We’re also seeing smaller banks in the Central Valley taking an interest, and definitely more private equity and wealthy folks wanting to be in here.

BRODY: Pretty much status quo although perhaps an increased appetite.

HINDE: The effects—both intended and unintended—of ZIRP (zero interest rate policy) and Frank Dodd will continue to drive bank mergers and acquisitions nationwide. The formation of new lenders coming into the wine industry has been sparse in this cycle versus the past up cycle for the above-mentioned reasons. The regular wine industry lenders that are present in both up and down cycles are still here. Most of the fair-weather lenders have been active for the past couple years, given the health of the industry, which is normal and what you’d expect to see at this stage of the cycle.

Have there been any trends in deal size?

DAY: Deal size has been increasing both in lending and M&A transactions. Much of this is being driven by the change in deal focus from tuck-in type vineyard acquisitions to brands and production facilities.

MCMILLAN: Deals continue to grow, fostered by land values and overall multiples in the market, which is frothy at this point by most standards.

HINDE: On the debt side, I haven’t seen any different trends in deal size.

BEAK: Deals of all sizes appear to be continuing to transact.

BRODY: I think banks are broadly more comfortable with higher levels of exposure to the wine industry, and as a result deal size has continued to increase.


Have you seen any other changes in wine finance during the past 12 months or related trends that impact financing?

BEAK: We’re seeing more activity from private equity and financial buyers and the associated deal structures that are required for those types of transactions. The wine industry is in a good position, especially in the premium-plus price points, although growth has slowed in other areas. There continue to be significant risks (i.e., environmental, drought, huge growth in craft beer and craft distilled beverages). The growth rate in terms of consumption has slowed somewhat but remains positive. The effect of the euro devaluation will definitely bring some serious strength to imports; that will affect some of the U.S. producers, especially their export businesses.

BRODY: I don’t see any noticeable differences other than more private equity-backed opportunities. Pretty much a continuation of the trend line. The key question is: What happens when a market correction exists, or when exogenous factors impact the industry in a given year?

MCMILLAN: Some added emphasis on Small Business Administration loans. Some discussion of REPO (repurchase agreement) financing has surfaced in discussions, but that is going to prove difficult for the fine-wine business. Family offices (private companies that manage investments and trusts for single families) and funds being formed to invest in vineyards continue to be mentioned, but today there is more smoke than fire there. Hedge funds have been more engaged in the business, and REITs (real estate investment trusts) have been considering the wine business.

Perhaps the greatest threat to wine finance is the change in the local mood in Napa, Sonoma and Santa Barbara (Calif.) with respect to zoning, permitting and negative impacts from traffic, tours and events. Investment is best made in more predictable environments. Some of the existing discussion
vis-à-vis regulation has moved to the point of considering claw-backs of prior permitting. While the effort to keep ag areas from wanton expansion is important, how that inevitably is done will have an impact in financing.

DAY: One of the significant changes has been the abundant supply in the bulk wine market. Despite successive larger harvests from 2012-14 and much higher volume on the market, the healthy end demand is keeping prices stronger than expected. Normally, with the volume of available inventory we’re seeing currently, we would have expected prices to drop more than they have. Some prices, like Napa Cab, remain surprisingly high, as negociants and opportunistic brands are still seeing strong case-good demand and can make a healthy margin even at the prevailing price per gallon. The other oddity in a market with quite a bit of bulk is that grape contracting for the 2015 harvest is still very active at good pricing. This again is a testament to wineries seeing strong growth trends in case good sales and anticipating that growth continuing in the coming years.

One of the related things that we’re very focused on in looking at deals is water. It’s been a bit of a paradox that during the persistent drought, we’ve had successively large harvests. However, that doesn’t mean that we aren’t very concerned with our clients’ water sources and access going forward. That has to be a consideration in any long-term deal we’re working on.

BISHOP: Land values for quality vineyards have continued to grow at exponential rates. As with all real estate it is location, but also areas that have specific qualities for certain varietals such as Pinot Noir have increased at even a greater pace.

HINDE: Wineries’ demand for prime vineyard land has remained strong and has been a trend for several years. Vineyard prices have increased especially in the ultra-
premium locations.

I believe we have some good runway left in this up cycle—both macro economically and for the wine industry—but many of the key decisions wineries and vineyard owners make have ramifications many years ahead, such as when they plant a vineyard (three to five years until fruit production) or materially increasing production (two to four years from harvest until that bottle of wine is selling). Can any of us say at this point in the cycle that in 2017, 2018, 2019 things will be going great given what’s going on in the U.S. and global economies? Those are the years that major ventures being made today such as the aforementioned will be coming online and will need to perform. This may seem funny coming from a banker whose job it is to make loans, but as a community bank (Exchange Bank) and a community banker, I want the wineries, businesses and vineyard owners I call my neighbors to prosper in the good times and weather the bad times.

Many times these key decisions are made when everything is going really well and banks are falling over themselves to provide more debt. Debt is a useful tool, but like anything (it) can be destructive if overused. One of my core beliefs is that I want my clients to have a good night’s sleep, and I think the window for these kinds of ventures is narrowing. My comments are not meant to be negative, but rather they are made as a prudent advisor to point out risks to keep in mind for my clients and the industry in general. Wineries with healthy financials going into the 2008-09 recession were far more ready to capitalize on opportunities than others that were leveraged up due to recent large capital investments. I don’t have a crystal ball, but there are signs for concern on the far horizon with the greater economy, which always has an impact on consumers’ wine buying choices.

Ben Narasin is a venture capitalist and freelance wine journalist. His work has appeared in the San Francisco Chronicle, Wine Enthusiast and other media outlets.

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