Mrz 09

Vineyard Defaults Surge as Bargain Wines Hurt Napa

Tag: Regionensigi.hiss @ 08:38

By Dan Levy – March 8 (Bloomberg) — In California’s Napa Valley, producer of the most expensive U.S. wines, 2010 may be a vintage year for foreclosures as the industry is squeezed by falling land values and a consumer shift to cheaper brands.

As many as 10 wineries and vineyards in Napa will change hands in distressed sales or foreclosures this year and next, up from none in 2008, according to Silicon Valley Bank. In a bank survey of vintners, 7 percent called their finances “very weak” or “on life support.”

“We have 250 vintner clients saying this downturn is the worst in 20 years,” Bill Stevens, manager of the bank’s wine division in St. Helena, California, said in an interview. “Anybody who was late to the party won’t have staying power.”

Land values in Napa, home to about 400 producers, have fallen 15 percent from the 2007 peak, driven in part by slumping demand for high-end wine, said Robert Nicholson, principal at International Wine Associates, a consulting and financing firm in Healdsburg, California. The decline makes it harder for owners to refinance mortgages, especially if the property is worth less than the loan.

Napa winery and vineyard loan defaults rose fourfold to 18 in the year through January, according to San Diego-based research firm MDA DataQuick. In the survey by Silicon Valley Bank, whose clients are mostly high-end West Coast wineries, 71 percent of respondents said credit is harder to get. The bank didn’t attach names to its estimates or survey.

The recession has set in motion a “secular change,” with budget-conscious consumers trading down to less expensive wines, said Peter Kaufman, managing partner at Pleasanton, California- based Bacchus Capital Management LLC, a private-equity fund that provides mezzanine financing to wineries.

Sales Fall

The dollar value of U.S. retail wine sales dropped 3.3 percent to $29 billion in 2009 after rising every year and almost tripling from 1991 through 2008, according to Gomberg, Fredrikson & Associates in Woodside, California. Though consumption increased 1.9 percent to 323 million cases last year, people are buying less expensive labels, the industry consultant said in a March 5 report.

Sales of super-premium bottles priced more than $15 declined 10 percent last year, and those over $30, defined as ultra-premium, fell at least 15 percent, according to Rabobank Nederland NV, the Utrecht, Netherlands-based bank that finances agriculture businesses. Napa and neighboring Sonoma are the top U.S. producers of premium wine, the bank said.

Screaming Eagle

“No more is it about stocking wine cellars with 5,000 bottles of Screaming Eagle,” said Bacchus Capital’s Kaufman, referring to a Napa “cult cabernet” that can sell for $750 or more a bottle. “High-rollers are discovering that there are lots of drinkable $20 to $40 bottles of wine.”

Kendall-Jackson, based in Santa Rosa, California, is the top-selling U.S. brand over $15 a bottle, said Eileen Fredrikson, partner at Gomberg Fredrikson. The “Franzia box,” a five-liter vessel that retails for about $8 from Livermore, California-based Wine Group LLC, is the most popular overall.

Super-premium wineries are likely to bear the brunt of changing consumer habits, and lenders will pressure clients who can’t cover costs to “seek solutions before the loan goes into default,” Rabobank said in a January report.

Cheaper imports from countries such as Chile, Argentina and Australia are cutting U.S. winery margins, according to Stephen Rannekleiv, lead analyst on the Rabobank report.

Grapes of Recession

“Consumers are looking at price point and saying that Napa is not the price they want to be buying at,” New York-based Rannekleiv said in an interview. “Wine prices drive grape prices drive land prices.”

Bill Harlan, maker of Napa’s Harlan Estate Proprietary Red that counts four perfect ratings from widely followed critic Robert Parker, said he expects to see foreclosures mount.

“No area is going to be unaffected by this financial meltdown,” he said in a telephone interview.

Harlan, whose Oakville, California, winery is 60 miles (97 kilometers) north of San Francisco, has seen the distress up close. In December, he acquired 21 acres next door known as Diamond Oaks Winery from businessman Dinesh Maniar, owner of two separate Napa parcels that are facing foreclosure, according to county land records and documents in U.S. Bankruptcy Court in Santa Rosa, California.

David Chandler, an attorney for Maniar, didn’t return calls seeking comment. Diamond Oaks lists a $35 bottle of pinot noir and a $30 cabernet sauvignon as “new products for March” on its Web site.

Few Deals

There have been few recent property deals because sellers are reluctant to accept the low bids they are seeing, said Tony Correia, an appraiser in Sonoma for Correia-Xavier Inc.

More than 30 wineries are for sale in California, Oregon and Washington, the most ever, according to Rob McMillan, executive vice president and founder of the wine division of Silicon Valley Bank, a unit of SVB Financial Group in Santa Clara, California. The properties have too much debt, were new arrivals to the wine market or have owners who are looking to retire as competition rises and profit margins fall, he said.

Some Napa land deals that were never publicly disclosed or confidentially recorded at the county assessor will unravel this year and in 2011, according to Vic Motto, chief executive officer of Global Wine Partners LLC, an investment bank and advisory firm in St. Helena that brokers property sales. He declined to identify which of the buyers may not be able to hold onto their properties.

“There were heavily leveraged transactions that occurred that were private, not transparent, and there is no data to show that,” said Motto.

Valuing Land

Napa land values, the highest among U.S. wine regions, are based on wine appellation, or a property’s geographical boundary, and soil quality, according to Correia, the appraiser. On-premises wineries are also valued by production facility and capacity and proximity to main tourist thoroughfares, he said. Napa Valley runs about 30 miles from the city of Napa in the south to Calistoga in the north.

Average prices are $150,000 to $200,000 an acre for a vineyard planted with red varietals such as cabernet sauvignon and $115,000 an acre for white grapes such as chardonnay, said Sean Maher, president of Maher Advisors Inc., a brokerage in St. Helena. The most desirable sites in Rutherford and Oakville can fetch $250,000 an acre, he said.

Napa Premium

Napa wine grapes have been the most expensive in California since the 1970s, said Terry Hall, a spokesman for the Napa Valley Vintners Association in St. Helena. Last year they cost an average $3,401 a ton, 56 percent more than second-place Sonoma grapes and more than double those from third-place Mendocino, a preliminary 2009 report from the state Department of Food and Agriculture shows.

California produces 90 percent of all U.S. wine, according to the U.S. Tax and Trade Bureau in Washington.

Mortgage defaults will also hit Napa residential parcels owned by hobbyists, or those who intend to produce 100 to 300 cases a year, said Deborah Steinthal, principal of Scion Advisors. In October, the Napa-based consultants forecast that “hundreds of properties will go into foreclosure.”

That’s the scenario facing Sandra Sutherland, who bought a four-bedroom house and more than seven acres of chardonnay, merlot and pinot noir grapes for $2 million in 2005. She and her business partner haven’t made loan payments to Charlotte, North Carolina-based Bank of America Corp. since January 2009.

‘Blind Fools’

“We went in like blind fools,” Sutherland said. “We didn’t really expect to get the loan, but felt committed when we did.”

Owners who have invested for years and managed land prudently should survive the tumult, said Harlan, who has produced 18 vintages since buying the property in 1984. The 2007 vintage of his flagship wine, the most recent, sells for $500 a bottle.

“In the long run, those that don’t compromise the quality, manage their wines better and manage their land better will be fine,” he said. “We just need to make sure we get through the short run.”

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