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.
[caption id="attachment_56997" align="alignright" width="328" caption="Moss-Adams Wine Industry Financial Roundtable speakers included (l to r) Quinton Jay, Bacchus Capital Management; Jed Taborski, Silicon Valley Bank, and Perry DeLuca with Wells Fargo Bank."][/caption]
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.”