US: Recovery Strengthens Wineries' Credit

(Wines&Vines) - The story of wine industry finance during the past 12 months combines contradictions and consistency. The contradictions come in the form of increased activity, competition and expanded players in some areas of finance, contrasting with consolidation in other areas—including the failure or exiting of some private-equity players entirely. Consistency comes in the form of uniformly low interest rates throughout the year, although a window into increases has appeared of late, and it is rocking financial environments far beyond just those for wine.

The backdrop for wine finance during this 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.”