Inspired by sessions with bankers at a recent wine industry financial
seminar, PWV obtained the help of lenders experienced in the wine
and vineyard industries to research and report on the process
of vineyard lending and analyze its attendant risk.
Types of vineyard loans
Risk assessment is relatively simple for lenders when it comes
to the most common type of vineyard loan: the self-liquidating,
single-season loan. In such loans, growers apply for money to
get a crop from pruning to harvest, then repay the loan at harvest
when the crop is sold. In this instance, a lender has only to
review the growers grape contracts for that season, or the
winerys projected use and sale of the grapes, in order to
assess risk for a short-term loan.
Analyzing the risk of long-term vineyard loans is very different.
For vineyard development, redevelopment, and acquisition financing,
loans of up to 20 years in length are requested, and they must
be carefully assessed and written by lenders.
Covenants and conditions
Covenants and conditions are lender terms pertinent to risk analysis
of a loan. A covenant is a circumstance of the borrowers
financial health upon filing, which must remain viable for the
life of the loan. Examples of a covenant might be a vineyard capital
ratio of 1.5 to 1, a debt-to-net-worth ratio not exceeding 1 to
1, etc. Covenants can alert the lender to a decline in the strength
of the borrowers business as the loan term progresses.
Conditions are requirements that attach to a loan and must be
present and correct for the acquisition and continuing health
of the loan. Prime examples of vineyard loan conditions are pre-existing
grape contracts, maintenance of insurance, timely filing of tax
payments, and annual financial reports.
Is there a checklist, then, of covenants and conditions? Not according
to lenders. Covenants and conditions are too specific to
each case for us to offer any kind of blanket checklist,
says Bill Rodda, vice president at American Ag Credit (Santa Rosa,
CA). One failed condition in an applicant might be countered
by another condition which is very strong for them. In commercial
banking like this, some risk elements in a growers business
plan will be countered by other strengths. Loans themselves can
then be tailored to the risk amount loaned, interest rate,
Matt Tucker, senior vice president and division manager at Banner
Bank (Walla Walla, WA) reports, A winery or grower can fail
some covenants and still expect to be granted a loan. It isnt
the number of covenants failed, but the severity of covenant failures
that needs to be assessed.
It is certainly possible for a borrower to fail a covenant
in a technical sense while the bank does not see associated credit
risk, and therefore may not declare a loan default. On the other
hand, failure in even one covenant allows the bank to declare
a loan default, and therefore exercise its rights under default,
which could include refusal to loan more money.
Generally, banks will try to work with a borrower who has broken
a covenant, so long as the failure was not a willful event on
the part of the borrowers and does not represent a significant
threat to loan repayment. Covenants, then, can be flexible, while
conditions are terms which must continue to be met in an ongoing
Cash flow impact
The vineyard industry is presently experiencing over-production,
which has resulted in lower pricing and depressed cash flow. Banks
anticipate downward trends in cash flow as lower grape prices
impact growers in the short term. Long-term grape contracts at
set minimum prices mitigate this problem for some growers.
All of this depends on where you are in the hierarchy,
maintains Travis Foxx of Merchant Capital (Portland, OR). If
you have prime Napa Valley vineyards with limited production,
your case is very different than if you are located in the Central
Valley of California and have more fruit than you can sell.
Rob McMillan of Silicon Valley Bank (St. Helena, CA), agrees:
In the higher volume vineyards, there is widespread price
compression and some vine removal. In the best vineyards, prices
are holding and even rising still. The middle, though, can have
virtually any number of possibilities, including growers trying
to replant while prices are soft.
Washington state shows similar cash-flow-by-growing-region statistical
variations. In Walla Walla, pricing has held relatively
well, and good quality vineyards continue to show positive cash
flow (at least at vine maturity), reports Tucker. In
the greater Columbia Basin, cash flow has suffered as pricing
has become depressed.
Lindsay Wurlitzer, regional vice president at American Ag Credit
(Santa Rosa, CA), sees soft wine sales as exacerbating growers
cash flow problems. At the winery level, sales and pricing are
down, and this flows down to growers. Given market conditions,
wineries want to pay less for grapes. Wurlitzer estimates conservatively
that more than 50% of existing grape contracts were renegotiated
this year, but the figure could be as high as 75%.
How does a bank write loans against grape contracts that are likely
to be renegotiated? Industry knowledge and asking lots of
questions to assess the risk, Wurlitzer replies.
Interest rate factors
All lenders in this report expressed astonishment that interest
rates continued to decline in 2003. I never thought they
would go as low as they have today. We are at historic lows,
says Tucker. With Fed funds at 1.0% today (August 2003),
there simply isnt any way for rates to get much lower before
they are so close to zero that they mathematically cant
Thus, all lenders felt safe in predicting interest rate hikes,
albeit slowly, over the next five years. If you believe
the Forward Yield Curve, says McMillan, the rate forecast
is mixed for the next year and then shows increases of roughly
1/2% thereafter. (See Table I, the
Forward Yield Curve.)
Wurlitzer and Rodda offer separate advice for short-term, seasonal
vineyard loans compared to long-term loans. For short-term,
self-liquidating loans, look to Alan Greenspan and the Fed policy,
advises Rodda. This affects the Prime, or Reference rate,
which most short-term loans will start at, depending on risk (Prime
plus 1/2, Prime plus 1, etc.).
Long-term loans wont behave the same, explains
Wurlitzer. Those interest rates will be tied to the treasury,
to bonds, and long-term economic forecasts. American Ag issues
its own bonds through its funding corporation in New York. Our
bond yields can be tracked in the Wall Street Journal. The rates
track fairly closely to U.S. Treasury bonds.
New vineyard loans still possible?
While lenders are certainly conservative these days about loaning
money for new vineyards, they are still willing to fund new planting.
Its a capitalist economy banks are out to loan
money to make money, and provided the risk assessment is good,
theyll continue to do it, asserts Rodda. Cycles
such as low prices can come around again to top dollar. The business
cycle for vineyards is roughly seven to eight years, and experienced
vineyard lenders understand that cycle. Look at Turrentine Wine
Brokerages Wheel of Fortune for a good overview
of the cycle.
Some borrowers have the ability to survive this kind of
cyclical overproduction and others do not, agrees Tucker.
We support those borrowers with the financial capacity to
be viable in the long run despite temporary over-supply and pricing
pressures, particularly in appellations like Walla Walla that
are not suffering to the extent of other regions. The current
market glut is a classic agricultural phenomenon.
In such a conservative environment, lenders look for borrowers
with secondary sources of loan repayment. These borrowers have
investors or other property outside of the vineyard project that
is the subject of the loan. Thus they can repay the loan even
if the vineyard does not support the payments in an economic downtown.
Even vineyards without existing contracts are considered for loans.
Only about half of the lenders interviewed by PWV responded negatively
to the idea.
If a vineyard is in a special American Viticultural Area
and/or if the grower is substantial enough to fund a vineyard
from outside funds should the market slump be extended,
affirms McMillan, we will make a loan without a grape contract.
All of the banking officials who would consider loans without
grape contracts mentioned the need for other indications of firm
business footing, such as other properties or investors to fall
Some growers, knowing their risk will be assessed as high and,
not wanting to pay resultant higher interest rates or risk not
qualifying for a loan, choose a lease against the appreciation
of the vineyard property and its yields over the long-term. Leasing
offers potentially lower interest rates and no down payment, along
with some tax benefits, but lenders recommend avoiding it for
the sake of long-term financial stability.
For all practical purposes, leasing is really just a form
of debt, but is not the same as holding 100% equity in your property,
says Tucker. Having high levels of equity is absolutely
essential these days in the industry. If you dont have high
levels of equity, you wont control your own destiny. Those
companies that need the zero-down benefit of a lease often wont
qualify for a lease.
a lease, explains McMillan, you effectively have the
sum of the cash flow from the vineyard over the term of the lease
as collateral. That is a depreciating asset. When the lease ends,
there is no value to the lease.
McMillan outlines a strong leasing arrangement as one with several
parties involved. A grower would bring in an investor as the landowner/partner,
and a winery to guarantee the contracted sale of the grapes over
the long term of the lease. The grower uses lease funds to develop
the land and produce the grapes, which the winery then bottles.
In the end, the landowner is able to keep the land and get an
income stream without investing any development dollars. Plus
he or she owns a producing vineyard at the expiration of the lease
period. The winery gets the grapes without having to come up with
the cost of land or land development. The bank is in a less desirable
position (risk-wise compared to a loan) but as a result can charge
higher interest rates and thus make more money from the lease
if the grower is successful.
But the downside for the grower is that his business is centered
on the grapes from a leased vineyard. With no ownership, the growers
position is at risk when the lease runs out. Thus lenders advise
that this is the least desirable business plan for a grower.
Industry experience critical
Growers are best served by bankers with strong knowledge of the
vineyard and wine industries, lenders say. Lenders with such experience
understand the growers risk and challenges and serve the
growers needs better than bankers outside the industry.
Such lenders are also more likely to write loans than those with
no industry knowledge.
As with vineyards, a lenders location can be important.
Banner Bank sits in Walla Walla, in Washingtons prime winegrowing
country. Tucker, who handles the banks wine and vineyard
clients, started his career with a company that developed Canoe
Ridge Vineyard, later sold to Chalone Wine Group. Tucker is a
stockholder there, and he still holds an interest in Forgeron
Cellars and Ash Hollow Vineyards.
My personal banking background involves a significant level
of agricultural lending, so I absolutely understand that agricultural
economics are cyclical, explains Tucker. I understand,
going into a production loan, that we will see strong economic
periods as well as weak periods.
Mary Leonard-Wilson has been a wine/vineyard industry loan officer
for nearly 10 years at National Bank of the Redwoods (Santa Rosa,
CA). NBR works with growers, wineries, and winery suppliers as
a large part of its customer base. We prepare for the cyclical
nature of the industry by measuring the impact of a downturn in
grape/wine prices on the growers cash flow, and discussing
plans with our customers. Options are numerous, including downsizing
operations, decreasing expenses, recapitalizing the business,
postponing growth plans, focusing on quality development, and
McMillan runs a full-service Wine Division of Silicon Valley Bank.
We specialize in banking wineries and vineyards. Its
all we do. The wine industry is a very complex market in which
to develop expertise. Many banks, like the tides, are in when
the market is good and out when its bad. There is insufficient
time to develop real expertise through the lending staff and credit
We roll with the tide by aggressively marketing
for new business, assisting borrowers in removing vineyards that
need replanting to prepare for the next upturn in the market,
and trying to find ways to accommodate borrowers collateral
positions, concludes McMillan.
Travis Foxx has been president of Merchant Capital (Portland,
OR), a consulting company that helps wineries obtain or restructure
their financing, since its inception in 1991. My perspective
is that of an outsider, not a direct lender, so I look at more
combinations and creative ways to mount a business plan in the
industry, explains Foxx. We not only arrange financing
for wineries and vineyards, but also lease equipment and barrels
and offer cash flow management assistance and debt restructuring.
Merchant Capital works with growers on many forms of financing,
from traditional loans and leasing to more creative methods. A
seller could become a partner in the new vineyard venture,
Foxx offers as example. Or a winery could participate in
the funding, or joint ventures between companies could be set
up. Existing vineyard operators could put in pure cash, sell assets
to raise cash, or even obtain short-term financing from their
own vendors in some cases. Other options exist sometimes
you just have to do a little brainstorming with all the parties
American Ag Credit has been an ag-specific lender for almost 100
years. The banks charter limits it to agriculture lending
exclusively. Wurlitzer has been with AAC for over 26 years, and
Rodda for over 20 years, mostly with grape and wine industry clients.
More than 90% of the loans in the Santa Rosa office go to wine
Weve have not changed our criteria or way of doing
business, whether the industry cycles up or down, says Wurlitzer.
When youre writing 20-plus-year loans as we have for
nearly a century now, youre going to write the next one
the same way you handled the last one, notes Rodda. Were
very consistent because we see the long term.
Bill Rodda and Lindsay Wurlitzer, American Ag Credit, PO Box 1200,
Santa Rosa, CA, 95402; tel: 707/545-7100; fax: 707/545-7200.
Matt Tucker, Banner Bank, 1 East Alder St., Walla Walla, WA, 99362;
Travis Foxx, Merchant Capital, PO Box 19069, Portland, OR, 97280;
tel: 800/333-5513; fax: 503/525-4365.
Mary Leonard-Wilson, National Bank of the Redwoods, 111 Santa
Rosa Ave., Santa Rosa, CA, 95402; tel: 707/573-4800; fax: 707/544-3115.
Rob McMillan, Silicon Valley Bank, 899 Adams St., #G2, St. Helena,
CA, 94574; tel: 707/967-1367; fax: 707/967-4827.