Napa wines losing ground as loan defaults rise
By: Dan Levy
IN CALIFORNIA'S Napa Valley, producer of America's most expensive wines, 2010 may be a vintage year for repossessions 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 repossessions this year and next, up from none in 2008, according to Silicon Valley Bank.
In a bank survey of vintners, 7 per cent 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. ''Anybody who was late to the party won't have staying power.''
Land values in Napa, home to about 400 producers, have fallen 15 per cent 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 per cent of respondents said credit was harder to get.
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, a private-equity fund that provides mezzanine financing to wineries.
The dollar value of US retail wine sales dropped 3.3 per cent to $US 29 billion ($A31.8 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 per cent to 323 million cases last year, people are buying less expensive labels.
Sales of super-premium bottles priced at more than $US15 declined 10 per cent last year, and those over $US30, defined as ultra-premium, fell at least 15 per cent, according to Rabobank Nederland, the Netherlands-based bank that finances agriculture businesses.
Napa and neighbouring Sonoma are the top US producers of premium wine, the bank said.
Super-premium wineries are likely to bear the brunt of changing consumer habits, and lenders will pressure clients who cannot 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 US winery margins, according to Stephen Rannekleiv, lead analyst on the Rabobank report.
''Consumers are looking at price point and saying that Napa is not the price they want to be buying at,'' New York-based Mr Rannekleiv said. ''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 expected repossessions to mount.
''No area is going to be unaffected by this financial meltdown,'' he said.
Mr Harlan, whose Oakville, California, winery is 100 kilometres north of San Francisco, has seen the distress up close.
In December, he acquired 8.5 hectares next door from businessman Dinesh Maniar, owner of two separate Napa parcels that are facing repossession.
David Chandler, a lawyer for Mr Maniar, did not return calls seeking comment.
Diamond Oaks lists a $US35 bottle of pinot noir and a $US30 cabernet sauvignon as ''new products for March'' on its website.
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.
Mortgage defaults will also hit Napa residential parcels owned by hobbyists, or those who intend to produce 100 to 300 cases a year . In October, the Napa-based consultants forecast that ''hundreds of properties'' will be repossessed.
That's the scenario facing Sandra Sutherland, who bought a four-bedroom house and three hectares of grapes for $US2 million in 2005.
She and her business partner have not made loan payments since January 2009.
''We went in like blind fools,'' Ms Sutherland said.
''We didn't really expect to get the loan, but felt committed when we did.''
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