Issue link: http://winesandvines.uberflip.com/i/718029
34 WINES&VINES September 2016 FINANCE being driven by real and perceived scarcity, particularly at the high-quality end of the spectrum. The M&A market has been robust, and this also fuels the perception of solid value. Ample credit is available for construc- tion—whether new or expansion and for vineyard development. WILLIAM BISHOP (WB), BMO HARRIS BANK: Given the overall general health of the industry and historically low and ex- pected future low interest rates, financially strong wineries are looking to consolidate through acquisitions, expand vineyard ac- quisitions to better secure longer term sourcing of supply and be more creative as well as environmentally friendly in their business. We are seeing new wineries—or expansion of current footprints—being built with more expensive LEED certification qualifications, a small move into organic wines and overall up-scaled tasting rooms and high-end construction materials. All of the above are contributing to higher level investment by the industry as well as maintaining and expanding pres- sure on real estate values. The large supply from the 2012, 2013 and 2014 harvests are beginning to become depleted. Many wineries, due to consumer taste and read- ily available supply, expanded and created new "red blends" that may come under pressure with smaller recent harvests. This scenario is causing real estate prices to rise not only in the core (California) regions such as Napa and Sonoma but also in Lodi, Lake County and other regions. Napa con- tinues to experience the highest average vineyard prices, with average prices in the $300,000 per acre range. What has happened to debt rates, terms and availability in the wine industry (wineries, vineyards, wine brands) in the past 12 months? AB: The current environment remains highly competitive. Rates are at historic lows, and terms and credit spreads continue to be ex- tremely attractive. For good quality borrow- ers, credit availability is high, terms are favorable and a lot of lenders are fighting hard to win their business. JH: As many veteran wine industry lenders always see at the top of the market cycle, terms, rates and structure from lenders in the industry loosen up, rates get even more competitive and credit structure is relaxed. Rates have been up and down over the past 12 months due to changes in the rate markets and the indexes most lenders base their loans upon. Many lenders base their rates on various Treasury indexes plus a spread; those Treasuries have been volatile. For instance, the 5 Year Treasury rate has ranged from 1% to 1.8% since December 2015, an 80bp (basis point) swing in the past six months. Debt is out there for nearly anyone looking for it right now. MB: There's a very high level of competi- tiveness among debt providers that have been involved for a while, and from new entrants. Willingness to lend, in terms of flexibility of structure and aggressiveness in pricing, are all at historic highs, particularly for quality operations. This indicates to me that we are nearing the end of the healthy cycle for the industry and some softening is on the horizon. Rates are mostly stable, but in cases of highly desirable wine companies, pricing continues to go lower. Terms are also stable, but there are situations where institutions are being very aggressive; as a recent ex- ample, I've seen a 25-year fully amortizing vineyard loan at a rate that is in par with home loan rates. WB: Short-term interest rates have been stable over the past 12 months, although as each quarterly Fed meeting approached, speculation abounds as to when the next in- terest rate hike would occur. We had ex- pected a rate hike in June; however, a weak labor market report just ahead of the June Fed meeting poured water over any idea of a rate hike now. Prior to the recent Brexit vote, most economists were fairly certain that we would see a 0.25% hike in both September and December of 2016. It is now highly unlikely that the Fed will raise rates at either of these upcoming quarterly meet- ings, and many believe rates will be flat well into 2017. As to mid- and long-term rates, the yield curve continues to flatten and long-term rates are at near historical lows. Although we do not predict much upward movement in rates for the foreseeable future, we are encouraging our clients to fix long-term fi- nancings through swaps, fixed rates, interest rate caps and other products to properly match the wine industry's long-term capital investment structure. Terms haven't changed much from 2015, given the flat interest rate scenario. WILLIAM BISHOP is the managing director of the San Francisco, Calif., office of BMO Harris Bank's Food and Consumer Group. Bishop estab- lished the group's West Coast office in 1998 to specialize in serving com- panies that produce wine and other commodities. Prior to joining BMO Harris Bank, Bishop spent nearly 25 years in domestic and international banking, focusing on the food and commodity sectors. He held senior positions at Credit Agricole (Calyon) and Rabobank International. JASON HINDE is a vice president in Exchange Bank's Wine Practice and has been supporting the wine and vineyard industries for nearly 15 years. Hinde started his banking career in the 1990s, lending to VC- backed startups in Silicon Valley before following his passion for wine to the North Bay. He worked in commercial lending at Mechanics Bank and Silicon Valley Bank—both in their North Bay wine-lending group and in their Silicon Valley technology-lending group. "RATES ARE AT HISTORIC LOWS, AND TERMS AND CREDIT SPREADS CONTINUE TO BE EXTREMELY ATTRACTIVE." Adam Beak, Bank of the West