Issue link: http://winesandvines.uberflip.com/i/152772
COVER STORY period has been one of continued economic and wine industry recovery. The upturn that we reported last year has continued, with increasing consumer demand for wine paralleling the perception of an improving economy following the recession. "From a consumption standpoint, consumers are recovering and continue to increase their rate of purchases," says Rob McMillan, executive vice president and founder of Silicon Valley Bank's Wine Division. Wine businesses that navigated the crisis have strengthened, resulting in greater credit worthiness. This increased bankability, combined with banks' access to capital at record low rates, has generated increasing desire to lend into the now more secure and more profitable sector. "Agriculture is one of the real bright spots in the California economy, and banks are starting to notice that," says Ernie Hodges, executive vice president of Farm Credit West. "It's very profitable for most lenders and most growers." Banks jump back in The increased attractiveness of lending into agriculture (and wine lending specifically) has started to draw new players into the market. "It is a borrower's market, with several commercial banks jumping back in due to the improved outlook," Hodges says. More banks mean more bidders for A+ credit quality deals, which puts pressure on pricing, tightens interest rate spreads (the difference between what a bank pays to borrow money and what it charges to lend it out) and lowers rates for the best borrowers. "It's not surprising to see credit offered at sub-prime (i.e. below prime rate) pricing in competitive deals," McMillan says. "Borrowers with the A credit have the power now." As lending has increased, the opposite is true on the equity side—or, more accurately, the private equity side of the equation. "There have been some major shifts," says Vic Motto, an investment banker and the co-founder, chairman and CEO of Global Wine Partners. "The interest in equity capital has substantially diminished as losses, the collapse of a major vineyard fund and of a major REIT (real estate investment trust), the liquidation of the largest consolidation, the collapse of a specific wine fund and a hedge fund that invested in distressed properties foreclosing on those, has tempered the interest of outside capital that didn't have industry expertise." To illustrate this point Motto points to: • CalPERS selling off its Premier Pacific Vineyards portfolio, "the majority of which have been sold at somewhat distressed prices." • Ascentia Wine Estates, which had "a couple hundred million dollars of transactions, which last year liquidated at a huge loss." • "Hedge funds that loaned to distressed wineries, foreclosed and now own them, like the former Kirkland Ranch. There may have been others." • "VinREIT, think over $100 million, liquidated all its properties at distressed prices." Motto's firm was involved in the creation of VinREIT, but it is no longer involved. The financial sponsor, Entertainment Properties Trust, a NYSE-listed REIT, decided to liquidate the VinREIT assets, implemented primarily in 2012. As the weaker players left the system, the remaining organizations began to standardize what they did well and better define their spaces in the market. "Foley, Vincraft, Bacchus, we've all gone into our respective corners," says Quinton Jay, managing director of Bacchus Capital Management. Each is focusing on "what we are known for and the strengths we bring to the table." One outlier, a relatively new player to the equity game beginning to garner attention, is Charles Banks of Terroir Capital. Banks first burst onto the wine scene with his involvement in the acquisition of Screaming Eagle. He now appears focused on building his own portfolio of premium brands through acquisition, most recently Mayacamas Vineyards in Napa Valley. He's "another player getting active," Jay says. "That's interesting to me. Another potential gorilla in the mist." JOHN ROSE Win es & Vin es sept em b er 20 13 29