Wine Industry Finance
What Finance Insiders Think
DEBT
How has the debt market for the wine industry been in the past year?
CHARLES DAY, RABOBANK: It has improved and continues to offer more options for industry borrowers as general market conditions improve and more competitors enter the market.
MARK BRODY, UMPQUA BANK: For stronger borrowers, the market has been fairly accommodating. However, for borrowers with weaker financial performance, banks are appropriately conservative.
PERRY DeLUCA, WELLS FARGO: Rising cost pressures are a result of tighter regulations. Bigger competitors have more flexibility in choices and navigating the increased environment.
QUINTON JAY, BACCHUS CAPITAL MANAGEMENT: I think we are still seeing the same situation as last year in that the “very bankable” companies are getting over-banked, and marginal borrowers yet good companies (meaning they might be missing a key credit criteria) are having a difficult time. The unbankable are still having a difficult time, and I don’t see change in the foreseeable future.
What’s happening/happened with interest rates?
CHARLES DAY: This is really a two-part question: index rates versus rates that wine industry borrowers are being offered.
Floating rate indices have remained at rock-bottom levels designed to stimulate the economy. We expect short-term rates to start moving up in early 2015. Longer term rates driven by bond prices have come up from record lows but remain historically very low. With the reduction in bond buying at the Fed level, and signs of inflation edging up, longer term rates could start rising soon as well.
The other part of the question relates to what a given winery or vineyard owner is paying. These rates are more and more competitive as the industry improves and the perceived risk in the sector drops, combined with additional lenders participating in the market, which is driving loan spreads down. For modestly leveraged, profitable wine industry companies, all-in rates (rate index plus spread) are very attractive.
WILLIAM BISHOP, BMO HARRIS BANK: Rates continue to be at historical lows, but recent and potentially sustainable political disruption in certain parts of the world is giving concern. In addition, although the Fed continues to manage low interest rates, the Consumer Price Index is clearly showing inflationary trends. Rents, medical care, clothing, food and other staples have been on the rise and will ultimately cause interest rates to rise.
ROB McMILLAN, SILICON VALLEY BANK: Long-term rates have to be separated between spreads over an index and the index itself. We haven’t seen a change in spreads over the past 12 months. That said, the best deals remain highly competitive. Long-term rates have, however, risen because the index widely cited for long-term loans is the 10-year treasury, which has seen a tick up in the past year.
Short-term rates have remained flat over the same period.
QUINTON JAY: Second-lien debt has not changed very much. The adjusted risk/rate profile (the cost of capital adjusted for the increased risk that second-lien lenders deal with compared to primary lenders with “first liens”) has been the same at 10%-12% for second-lien debt, given that higher risk has always been factored into the rate. As for first-lien lenders, the rates are following the LIBOR and Fed’s (rates).
MARK BRODY: Overall rates are very competitive, particularly so for strong borrowers.
PERRY DeLUCA: Rates continue to be competitive.
How about loan terms?
WILLIAM BISHOP: In general, terms have remained unchanged year over year; however more wineries are requesting refinancing proposals due to their (higher cost of) interest in longer term fixed-rate debt as well as (the) lower all-in cost of funding (from a refinancing). Financial performance as a whole has improved along with the economy, thus creating stronger balance sheets and ability to negotiate better terms from banks.
CHARLES DAY: The primary structural terms of Rabobank’s food and agribusiness loans don’t change significantly with the ups and downs of a given sector. Because of improving conditions, we are working with a higher number of qualified borrowers, but the basic elements haven’t shifted simply because the wine market has improved. Staying disciplined with loan structure has allowed us to maintain a very healthy portfolio through the downturn and puts us in a healthier place today and where we are able to offer even more to wine industry clients.
QUINTON JAY: We have not changed our terms for second-lien debt. However, for senior lenders and where rates have been, companies are looking to lock in these lower rates, and lenders are looking for shorter terms.
MARK BRODY: Terms can range from fairly standard for acceptable quality borrowers to fairly aggressive for strong borrowers.
PERRY DeLUCA: Slightly longer terms. Majority of the terms remain the same as previous years.
How has the availability of credit or leniency of lenders changed during the period?
QUINTON JAY: The wineries are divided up into three categories: very bankable, marginally bankable and unbankable.
The very bankable still have the upper hand and are getting the rates and terms they are looking for.
The real analysis needs to be the marginally bankable. Recently I have not seen banks getting more lenient but wanting to keep their current positions—not increas ing them but not decreasing them either. This has put pressure on wineries looking to grow beyond their bank’s comfort levels.
It is still not pretty for the unbankable.
WILLIAM BISHOP: There continues to be adequate availability of credit for wineries focused on managing the winery as a business. Banks are currently in a positive deposit position and strategically looking for ways to invest their assets.
Capital expenditure plans and requests are well received by banks as trends in consumption and asset valuations continue upward. For well-qualified borrowers, loan covenants, pricing and structure have become more lenient due in part to bank competition as well as greater comfort in asset valuations. For wineries that desire a pure lifestyle business, banks continue to require significant equity contribution from the owners.
CHARLES DAY: The availability of credit for Rabobank wine industry clients remained steady through the downturn. However, overall we are seeing more availability as the improving market attracts new competitors. Thus far, traditional banks have not pushed the boundaries that might attract regulator attention, but appreciating vineyard and winery asset prices will no doubt attract lenders that are willing to lend on asset values alone.
MARK BRODY: Banks will support strong borrowers with appropriate levels of credit and tailored structures that fit a given circumstance. As credit size shrinks and credit quality is acceptable, structures and availability of credit is not much different than it has been.
PERRY DeLUCA: The availability and leniency of credit is steady. Competition among lenders has prevented any major fluctuation.
EQUITY
How has the equity/investment/buyout market for the wine industry been in the past year?
CHARLES DAY: M&A activity is very strong for a variety of reasons, not the least of which is that asset prices have improved to the point where sellers, many of whom waited out the downturn, are ready to put their vineyards and wineries on the market. Vineyard activity is very strong as wineries seek to lock in long-term sourcing to feed growing programs. Other investors are also joining the vineyard market. Agriculture in general has been a strong sector for institutional investors, and within the sector more investment funds are being drawn to vineyards as an option that presents very attractive returns.
WILLIAM BISHOP: Larger wineries are looking at opportunistic strategies to diversify their brand, price point and/or varietal portfolios. Over the past year acquisition multiples have been relatively flat but may likely see an uptick, given the improving economy and movement upward in desirable price points, i.e. $15-$25 (per bottle wines).
MARK BRODY: We see the trend of smarter and smarter equity players in the market since the recovery period (2012-14). We see this as a very healthy trend.
QUINTON JAY: This past year has been one of the most busy in transactions from vineyards to wineries. I don’t know if 2013 was busier than 2012, but it would be very close.
ROB McMILLAN: Short story is the market is vibrant and transitions are continuing at a record pace.
PERRY DeLUCA: There have been few deals—focused on property changes, not brand changes.
LENDERS
Have any players (banks, financiers, private equity, etc.) changed?
CHARLES DAY: Beyond the fact that more traditional lenders are competing in the wine industry, outside equity sources have been steadily picking up. For many, the wine industry is a desirable place to invest, and we see more private investors willing to invest in the industry as their portfolio returns have been strong in recent years and provide the liquidity to take on direct equity positions in wineries. Private equity (PE) firms are always circling the industry, but the normal investment horizon of three to five years doesn’t work that well with the wine industry.
WILLIAM BISHOP: Since winery financing is a specialty business for banks, most current lenders have experienced senior lenders with at least 10 years or more in the industry and several bankers with 20-25 years’ experience plus.
ROB McMILLAN: The traditional players remain. Several banks have made modest attempts to lend to the wine business in the past year as banks’ appetites for assets heats up. It always seems to attract lender interest. That said, none at this stage have developed a serious interest in pursuing the business.
QUINTON JAY: Many of the players are still the same. The real important issue of this question is that there are not more “buyers” in the pool, and most of them are the same ones from several years ago. With the number of wineries, we need to increase the pool of buyer candidates.
TRENDS
Have there been any trends in deal size?
CHARLES DAY: In this market, we are seeing deals of all sizes. Our activity with larger winery and vineyard clients is growing, but so is the number of deals we’re looking at with smaller clients.
The strong trends in the industry, generally balanced inventory positions and impressive growth in direct-to-consumer sales are benefitting wineries of all sizes. We expect to continue to see more headline-making big deals in the industry, but the rising tide definitely seems to be floating all boats.
WILLIAM BISHOP: Deal size varies significantly due to the vast variations in winery size and needs. In the past year several smaller wineries have been acquired by strategic investors looking to build a portfolio of brands, and there remain one or two very large wine companies weighing their options as to current ownership. There is always the debate by wineries that have capital to grow as to organically diversifying their brands and/or pursuing a strategic acquisition to fill gaps in their portfolio. Multiples are beginning to creep back upward, but not to historical highs, as there is a more positive view on near-term economy.
Any other changes you have seen in wine finance during the past 12 months?
ROB McMILLAN: Most of the changes relate to the financing of direct-to-consumer efforts and expansion of
established California wineries into Washington and Oregon.
MARK BRODY: It might be somewhat harder for smaller companies without much of a track record to get financing at this point. The industry is doing well, and a clear divide exists between those that are performing well and those that are not or do not have much of a track record.
PERRY DeLUCA: Increase in specialty lending—including equipment financing, barrel lending and asset-based lending—are on the rise.
QUINTON JAY: DtC is important because of margin—not just top line, but how much it costs to get it sold all the way through to the consumer. The second factor is the consistency of the money that comes into the winery. How much EBITDA does it bring to the table for every bottle sold? With a wholesaler you don’t know when the order will come in, but with a wine club you know the money is running through every quarter. Of course you have to fight attrition and sign up more members. I like the consistency of DtC dollars, while with the wholesale channel your fate is up to somebody else.
We have seen a lot of activity in the Pacific Northwest in vineyards, wineries and brands. It will be interesting to see what other deals shake out there. The region is starting to take note with the recent Kendall-Jackson release of their Oregon wines and others to follow suit. Bacchus was in early in the Pacific Northwest with (Wine by Joe) Dobbes and Panther (Creek), but now bigger wine companies are coming in with distribution power.
