“It is very difficult to sell or liquidate wine that is out of vintage,” he said. “If all the others are selling 2018 chardonnay, and you are trying to sell 2017, it sends a message.”
That’s where the individualization of the lending relationship comes in. A given wine may have a recycle cycle that’s a vintage behind similar products on the market because of added aging or other brand approaches.
“From a collateral standpoint, we understand that, but we may say, ‘Hey, we know you’re individually selling 2017, but you’re still selling 2015 and 2016 chard. When your distributor is working on (selling) 2015 chard and then they go to another city and see your 2017 chard, it adds confusion to the market.”
Inventory outside of a vintner’s normal release cycle and changing liquidation value of that wine — what a lender could sell it for in bottle or bulk — comes into the collateral value equation for lines of credit collateralized with inventory, Popko said.
So far, winery lenders are asking more questions about the value of wine sitting in their clients’ tanks and barrels, but it hasn’t become a fervor yet, according to Steve Fredericks, president of Turrentine Brokerage, a Novato-based broker of grapes and bulk wine that also does collateral value reports.
“It’s not like we’re getting a lot of calls that collateral value is killing us,” Fredericks said.
‘OVERADVANCED’ WORKING CAPITAL
If a vintner is sitting on a large inventory of wine in bulk, and it’s not realistic to be able to sell the wine bottled, the lender may adjust allowable advances on asset-based credit line, according to Day. Depending on the credit line, the borrower provides inventory value updates monthly, quarterly or some other schedule. While he looks at the ongoing value of the inventory, higher stockpiles will impact value.
“If the winery is on a quarterly borrowing base and the value of the bulk wine has dropped so much that there is a negative balance and the winery is overadvanced, that sparks a conversation with the client,” Day said, noting that collateral valuation can be skewed by few bulk-wine sales, similar to what can happen with vineyard valuation.
A common lending strategy for winery lines of credit is to value collateral on the lower of cost or market, then offer credit at a percentage of that value, say 50%-60%. So collateral Napa cab that had been valued at $40-$50 a gallon but is now in the low $20 range can result in a dramatically lower borrowing capacity for the vintner.
Smaller, family-owned wineries and closely held vintners, the under $25 million financing deals Popko works with, don’t solely tap inventory and receivables for credit collateral, as they have more ready access through their company structures to assets such as estate or vineyard real estate. Larger vintners with company structures cross-collateralize their credit lines across holding, production, real estate and vineyard companies.
“We anticipate we will start seeing that soon if winery inventory sales start slowing down, but we haven’t seen it yet,” Popko said.
But adjusting debt levels downward isn’t easy for wineries, according to Day.
“Wineries may look at their vineyards or if they have multiple labels they may consider selling noncore labels, but it is not the ideal time to bring those assets to market,” Day said. “With the market readjustment going on, the prospective buyers are cautious.”
But such conversion of assets or other changes in leverage structure to cover credit challenges may be more trouble than it’s worth.
“If a lender does not expect it to be a long-term issue, then they are not likely to restructure the debt,” Day said.
Jeff Quackenbush covers wine, construction and real estate. Contact him at [email protected] or 707-521-4256.
