Nonetheless, combination of low interest rates, improving market make timing good
SANTA ROSA — Increasing competition, along with volatile U.S.-global economies and capital markets, are affecting the way wineries are being financed, according to banking and capital-management experts at the Moss-Adams LLP Wine Industry Financial Roundtable. The quarterly event attracted more than 65 CEOs, CFOs, winery owners and managers to the Vintner’s Inn on May 31.
Rick Boland, senior business consultant with Moss-Adams LLP, introduced a panel of speakers including Perry DeLuca, senior vice president with Wells Fargo Bank’s wine, food and beverage group, Jed Taborski, deal team leader with Silicon Valley Bank’s (SVB) wine division, and Quinton Jay, managing director with Bacchus Capital Management, LLC.
According to Mr. Taborski, SVB’s pre- and post-recession underwriting criteria have not changed.
“I doubt that many other responsible lenders have changed theirs much either. We use the same ratios and methodologies across the industry. However, the number of companies that can hit minimum hurdles, mostly profitability and cash flow, declined during the recession. As the economy has continued to improve, albeit at a slow pace, financial performance across the wine industry has been improving.”
Mr. DeLuca said, “The wine market today is highly competitive, even for the best firms seeking capital. The current interest rate environment has held fairly steady since 2008 and remains at historic lows not seen since the early 1950s. With the economy in a continued state of low growth and a lack of inflation, we may expect these rates to continue in the short term.”
The U.S. prime rate has fallen dramatically from 21.5 percent in the early 1980s to 3.25 percent currently, largely due to globalization, leading to a situation where the prime rate moves in lockstep with the Lender Interbank Offering Rate (LIBOR).
Mr. DeLuca believes that several factors can affect future rates. The fiscal cliff and GDP drag in the U.S. are major concerns.
“Drag” has been defined as the dampening effect on aggregate demand and Gross Domestic Product that slows efforts to expand the economy due to rising national debt, high government spending and taxes.
Other variables include the stability of the Euro and EU Bank system uncertainties, flight to quality (leaving the Euro to invest in U.S. Treasury notes), political considerations in the U.S. and abroad, along with unemployment, inflation, deflation and Fed policy — as well as the fact that China and emerging markets now represent 34 percent of world market cap.
Wells Fargo focuses on firms with products selling at good margins, with strong direct to consumer sales or a three-tier sales model, and with fixed asset or cash-flow based coverage, depending on the size of the firm.
While financial metrics remain the primary criteria for bank winery investments, non-financial factors are equally important.
“The experience and resources of the management team weigh heavily in our decision-making process,” said Mr. Taborski. “We also look at business plans to see if a winery has a clear path to market, growth expectations and a solid sourcing mix. We want to know if fruit from a vineyard has a home, and the strength of the buyers.”
Having financial statements prepared in proper fashion, according to GAAP rules for wineries — and on a cash basis for most vineyards — is crucial, as well as transparency and communications.
“Everyone hates surprises. It is important to raise issues early through an open, candid dialogue and through quarterly state of the business updates.”
When making a winery investment, Silicon Valley Bank examines a firm’s sales velocity and asks questions such as: “Are wines moving in a 12-month cycle, and what is the status of sales versus depletions?” Recurring cash flow and coverage ratios help determine how a firm is going to repay debt.
Capitalization (debt to equity ratios and net worth calculations) and liquidity (accounts receivable records and the ability to convert inventory to cash) are vital considerations.
“Companies that are well run and very healthy are those that banks want to do business with. Competition is intense for these firms and largely a beauty competition with respect to term sheets,” Mr. Taborski said.
“Everyone is playing here, including banks, farm credit, insurance and private equity firms.”
Current loan structuring elements at SVB for working capital lines of credit include a formulaic line calculation based on an 80 percent advance rate on ARs, 50-65 percent on FOB and 50-65 percent on market bulk price secured by personal business property with terms from one to three years.
New equipment financing is available up to 75 to 100 percent of the cost with loan terms and amortization matching the useful life (including barrels). While leasing is often a more expensive option than bank financing, it may be a viable alternative at an earlier life stage.
Real estate loans of 50 to 75 percent (loan to appraised value) on improved land are available with terms ranging from five to 25 years.
Personal guarantees may or may not be required, but they can serve as a credit enhancement for a lender to consider when financing a business that has insufficient cash flow and/or collateral.
“Debt markets for the wine industry are robust right now. There is a small group of mainstay lenders, including SVB, that have remained in the market throughout the downturn. Additional players are joining the market as the health of the economy and industry continue to improve,” Mr. Taborski said.
“These factors, coupled with the historically low interest rates, make it a terrific time to ensure that your financing partner and package are consistent with your needs and in line with your goals.”
He added that companies should be focusing on the strategic value their financing partner can provide, beyond just capital, that will help increase the success of their business.
Over the years, the wine industry has traditionally relied upon either secured-bank financing, investments from family or high-net worth individuals, but this is changing.
“Banks have been stretched in many circumstances, but holes still exist. As the wine industry has grown – the need to source capital outside of traditional sources has also increased,” said Quinton Jay with Bacchus Capital Management, LLC.
“Private equity and second lien lending are outgrowths of these needs, providing capital at different points in a winery’s balance sheet.”
He said that while these options are more flexible in terms of structure than bank-lending, they require higher returns to compensate for additional risk.
Furthermore, while private equity can allow the benefits of cost sharing over a number of investments in order to foster growth, it comes at the price of control or at least a limitation on the scope of actions for existing owners.
Alternative capital can address five areas of need:
- Refinancing — Paying down part of all of an existing loan,
- Added Liquidity — Extra cash for wineries to weather the storm when secured capital from banks is “tapped out,”
- Buyouts and Growth Capital –Funds for expansion, sales and marketing or direct to consumer initiatives and for acquisitions, strategic or joint ventures,
- Control Issues — Liquidity for estate planning or intergenerational and partnership transitions, and
- Bridge Financing – The need for short-term financing in order to close a transaction.
“Bacchus seeks borrowers with established brands who are poised for growth, as well as partnerships with wineries with growth potential. We can also provide a range of consulting services with in-house expertise in distribution, brand development and operations,” Mr. Jay said. “That’s why our capital is value-added.”
“Wineries that need capital need to look for new solutions and creative partnerships. Bacchus provides alternative financing and very flexible capital, which can — and often does – sit side-by-side with traditional lenders. Our funding, especially our private equity option, is particularly well-suited to family-owned wineries.”
The next Moss-Adams LLP financial roundtable will be held in August. For information call 707-527-0800, or email: email@example.com.
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