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CO VER S T OR Y Finance Companies for the Wine & Grape Industry Wines & Vines has identified these financial institutions as leaders serving the West Coast wine industry. Companies were chosen based on demonstrated involvement in vineyard and winery finance, number of clients, size of portfolio, size of wine team and other factors. See details on pages 34-35. REGIONAL & SPECIALTY BANKS Comerica Bank First Republic Rabobank Silicon Valley Bank Wine Division Umpqua Bank Union Bank BIG BANKS Bank of America Merrill Lynch Bank of the West US Bank Wells Fargo SECOND-LIEN LENDER Bacchus Capital Management market. They've often rushed out when difficulties set in. Everyone from REITs (Real Estate Investment Trusts) to hedge funds to (more recently) private equity groups have entered the market to invest in or buy assets in the wine industry. Banks over time and today Banks are not immune to the influence of good times. "At the peak of a cycle, peo- ple take more and more risk," McMillan says. "That's what sets up a cycle." After the crash, the opposite was true. "Banks weren't looking for any credit." Now with a new normal, "Banks are looking for good credits" again. But even in the high-quality credit category, lending appetite is not evenly distributed across banks. According to a June 25, 2012, story on Bloomberg.com, "The biggest U.S. banks are extending less credit, (and) regional lenders (are) stepping in to fill the gap." The issue is the increasing financial requirements on the largest banks to shore up their finances and ensure they can navigate continued economic trauma if need be. According to Bloomberg.com, the four largest U.S. banks, two of which are active wine lenders (Bank of America and Wells Fargo), decreased their loan volumes by 5% in the first quarter, while lending by the smallest firms in the index increased roughly 10%. "The big banks FARM CREDIT CO-OPS American Ag Credit Farm Credit West Fresno Madera Farm Credit COMMUNITY BANKS Bank of Marin Exchange Bank Mechanics Bank INSURANCE COMPANIES John Hancock Financial Services MetLife Agricultural Investments Prudential Financial are trimming assets to satisfy stricter capital rules and regulatory demands to dispose of risky loans, while regional lenders are picking up customers." Of course, bank size affects loan size. "Banks tend to get involved in credit space by size of bank," Motto says. "Big- ger bank, bigger credit. The ones that succeed are the ones that do the most, as they tend to learn the most." Types of debt Big bank or small—or some other entity entirely—if you are looking for debt capital to feed the growth of your wine business, you'll find it comes in two basic forms: short-term and long-term. Short-term debt, which tends toward lines of credit with one- to two-year terms, is for annual operational realities. The amount available is tied to a percent- age of receivables, inventory and other assets, and the lines can be drawn down as needed to the limit those assets' sup- port (see Example 4 on page 33.) Short- term debt is meant for short-term needs, and repayment must be supported by the current cash flows of the business. Long-term debt is available to firms with suitable credit (the definition of "suitable" varying by lender) for long-term assets such as vineyards (known in the finance trade as "dirt loans"), wineries and long- lived equipment. Terms on these loans can In some cases, initial bank loans allow the borrower to develop a prop- erty to the point that it qualifies for a loan from a more risk-averse lender, like a big insurance company. WINES & VINES SEPTEMBER 2012 25 be five to 10 years or longer, and they func- tion much like a home mortgage. A fundamental difference between winery loans and home loans is that, while the payments may be computed (amortized) over a term as long as 20 to 30 years, the loan itself will have a shorter life—say five to 10 years, with the remain- ing balance due at the end of the term, known as a "bullet" or "balloon." In most cases, the final loan is not re- paid but refinanced at then-current rates. This benefits the borrower in an era of falling interest rates, but when rates rise, so do the rates upon refinancing. Types of lenders Different types of lenders offer differ- ent types of loans, though many overlap. "There are short-term lenders and long- term," says Bill Beyer of Prudential, a large insurance company that makes long-term loans to the wine industry. "A business should operate on (short-term) bank debt and capitalize with long-term debt." In some cases, initial bank loans allow the borrower to develop a property to the point that it qualifies for a loan from a more risk-averse lender such as a big insur- ance company, which can bring rates down and extend terms. Vineyard-development loans finance the planting of a new vine- yard, with only interest being paid during the development period (see Example 5 on page 33.) Once the vineyard is producing and the loan is due, the property may be refinanced with a long-term loan. Banks play in a diverse array of debt instruments. "We do everything including TOP 20 WINE INDUS TR Y FINANCE