Issue link: http://winesandvines.uberflip.com/i/562166
September 2015 WINES&VINES 41 FINANCE "These are tough times for appraisers, as borrower expectations exist for higher and higher values based on grape prices, regulatory issues and percep- tions of a hot marketplace." MARK BRODY, UMPQUA BANK "While the effort to keep ag areas from wanton expansion is important, how that inevitably is done will have an impact in financing." ROB McMILLAN, SILICON VALLEY BANK vineyards relative to water and labor could cause some permanent shifts in vineyard economics. Some "high-water" comps exist, but ap- praisers are being appropriately cautious relative to needing to see comps and see sustainable econom- ics in the properties. Another trend in terms is more use of government guaranty programs in loan structures. BISHOP: I have not seen signifi- cant changes in terms over the past year. There is, however, greater in- terest in fixed-rate term debt in an- ticipation of the eventual interest rate hike. Several of our clients have experienced improved finan- cial 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 hope- fully benefit from three outstanding vintage years: 2012, 2013 and 2014. HINDE: I haven't seen terms materi- ally change from a year ago, how- ever 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 availabil- ity of credit—but even established lenders are increasing their focus on the industry, further adding to that availability. BISHOP: Credit availability re- mains strong. There are numerous financially strong banks focused on the wine sector. There is credit avail- ability for all levels of wine compa- nies—from smaller boutique wineries with specialized credit needs to the more corporate-level, cash flow-driven, larger wine companies. BEAK: Availability of credit contin- ues to be strong, with multiple banks fighting it out for good quality credit. McMILLAN: Credit is widely avail- able. There is a lot of liquidity in fi- nancial markets begging for a return. Lenders who have demon- strated 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 in- dicator of an over-heated market, but it's difficult to draw parallels from historic activity given the tu- multuous world economy of the past decade. EQUITY 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 ac- tive. Among the large, privately held companies (e.g., Gallo, Wine Group), we've seen activity as well. 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 tril- lion mark, the results of which are hard to predict, but it would not be good. The second half of the rate ques- tion 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 in- dexes (Prime, LIBOR and Treasur- ies) 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 sta- ble from a term perspective. Since the industry is doing well, we're starting to see some new, inexperi- enced 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 bor- rowers qualify. BRODY: One of the factors impact- ing loan structure is appraisal value. These are tough times for ap- praisers, as borrower expectations exist for higher and higher values based on grape prices, regulatory issues and perceptions of a hot mar- ketplace. Higher risk elements in CHARLES DAY is a regional manager with Rabobank's Agribusiness Divi- sion. Day is based in Santa Rosa, Calif., and is responsible for develop- ing 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 com- mercial lending at Mechanics Bank, working with wineries, growers, busi- ness 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 tech- nology-lending group.