Silicon Valley Bank’s (SVB) sudden collapse last week sent tremors across the wine, finance, and venture capital industries, with the fear of lost funds prompting the federal government to take unprecedented action to guarantee all deposits.
As a leading lender to premium wineries on the West Coast, SVB played an integral role in providing liquidity and analytics to wine businesses, and its downfall created anxiety over the weekend. While the subsequent response from the federal government alleviated some concerns, industry experts suggest there are other issues more pressing than recent bank failures.
Greed and Fear Lead to Chaos
Regulators took over the bank on Friday after it failed to secure the $1.8 billion needed to cover deposits. The losses affecting SVB stem from Treasury bonds purchased in past years, and in today’s higher interest rate environment, with capital inflows diminished, these investments lost value and triggered the demise.
It took more than misguided risk management to bring down SVB, with the quickest bank run in history facilitating the collapse. “There’s a herd mentality in Silicon Valley when it comes to jumping into investments, and also a herd mentality when rushing for the exits,” Armand Gilinsky, professor of business and former director of Sonoma State University’s (SSU) Wine Business Institute, told VinePair. “There’s a lot of psychology involved.”
Social media helped play a role in accelerating the bank run, too, as thought leaders voiced their concerns, and the echoing of fear prompted many to remove their money. In a statement released Sunday, House Financial Services Committee chairman Patrick McHenry described the debacle as “the first Twitter-fueled bank run.”
How this will affect the hundreds of wine businesses that banked with SVB remains to be seen. Gilinsky advised that the short-term shakeout from the collapse will take time to fully understand, saying, “We won’t know for six months to two years because the cycles are so long in terms of what to plant, where to plant, and what to make.” Access to financing, or lack thereof, affects the ability to take on capital-intensive expansions or redevelopment efforts. But, he added, “the wine industry has a bigger set of problems.”
”The real issue is the persistent problem of liquidity. Inventories are expensive to build and maintain, and hard to move,” Gilinsky said. “The biggest need for cash is now, early spring, when vineyards are getting ready for the 2023 production cycle.”
In an effort to prevent panic, the Federal Reserve released a joint statement on Sunday, guaranteeing all deposits due to “systemic risk exception,” including accounts in excess of $250,000 for both SVB and Signature Bank, the second and third largest bank failures, respectively, in U.S. history. Before the announcement, the biggest fear in the industry was accessing cash to cover expenses and payroll.
Katherine Jarvis, president and founder of Jarvis Communications, a PR firm specializing in premium wine accounts, said in an emailed statement to VinePair, “I’m sure it was a huge relief to everyone to hear that depositors are protected.”
(VinePair reached out to dozens of wineries that had banked or appear to still bank with SVB, according to a publicly available list, but received a blanket response of “no comment.”)
The protection Jarvis mentioned comes in the form of the Federal Reserve’s newly created Bank Term Funding Program (BTFP). While framed as not a bailout, where “no losses will be borne by the taxpayers,” according to President Biden’s statement released by the White House, the mechanisms for funding the backstop are being hotly debated.
Investment Banks Eyeing SVB’s Assets
Attempts to auction off SVB failed to find a buyer over the weekend, but talk of splitting its assets offers hope for the wine industry.
A recent SEC filing for the fiscal year ending Dec. 31, 2022, detailed $1.158 billion in active loans to winery clients. In interviews this week with other publications, Rob McMillan, SVB executive vice president of the Premium Wine Services division, estimated the value of the loan portfolio and related business at $1.4 billion. Meanwhile, the client list, with approximately 400 wineries — including high-profile producers such as Chateau Montelena, ONDA, and Ram’s Gate, etc. — is an attractive prospect for potential buyers.
Creating order out of the SVB fallout presents unique financing and marketing opportunities. “Assuming there is no real contagion or general liquidity issues in banking, regionally this could lead to more lenders getting involved in the wine industry and also start-up debt,” said Robert Eyler, professor of economics at SSU and leader of the respected Annual Economic Forecast, which covers prestigious wine-growing regions in Northern California.
The loss of SVB rattled nerves over the weekend, but “there may be new opportunities for lenders, that were otherwise not able or willing to get engaged, to now go and market to winery clients,” Eyler said. “This should be a client list that is a mouth-waterer for lenders, and there will be a race to fill in what was left behind.”
Even with lenders likely to emerge as the dust settles, wine businesses looking to expand are faced with supply chain bottlenecks, pricing increases, and higher interest rates that make loans to purchase land and equipment more expensive. Compounding matters is the fact that the wine industry is increasingly struggling to maintain market share.
With the promise of new capital investors considering taking over SVB’s assets, the likelihood of the wine portfolio finding a new home looks cautiously optimistic. In a Monday update to his widely read blog post, McMillan noted, “We’ve been listening to parties interested in buying the full Wine Division. Thus far there are 7 parties, three of which are banks who have reached out. We have no authority to act in these discussions, but we are listening, talking, and directing them to the FDIC.”
While SVB maintained a significant portfolio and substantial influence, with a focus on premium Napa Valley wineries, it was not the biggest lender in the wine industry. American AgCredit, a cooperative headquartered in Santa Rosa, Calif., in the middle of wine country, manages approximately $8 billion in farm loans, and other major players include Rabobank, Wells Fargo, and Bank of America.
Future of Wine Industry Report
SVB’s understanding of the wine industry at large, and its ability to accurately assess potential borrowers’ assets, made it an invaluable partner. The bank detailed its analyses in its highly influential annual State of the Wine Industry Report. The project could continue with a new sponsor — and many in the industry are hoping that it will — if the bank or division is purchased. Alternatively, the Wine Business Institute could help publish. The institute was founded in 1996 as a partnership between the wine industry and SSU’s School of Business and Economics.
While SVB executives claim they were blindsided by recent events, statements included in the report suggest some could (or should) have seen trouble brewing. On page 12 of this year’s edition, McMillan wrote, “We aren’t making any predictions about the national and world economies.” However, by page 96 he predicted “we are likely entering difficult national and world economic times.” McMillan also noted the “increase in financing costs due to Federal Reserve bank action,” but this observation was ironically buried in the “Tailwind” section of the report.
After discussing the primary issue of younger consumers choosing other drinks over wine, and listing a litany of challenges facing the industry, McMillan asked, “Have we ever had a more difficult business environment to conquer?” The data that follows reaffirms the significant obstacles facing wine businesses. The Wine Sentiment Index, which gauges industry participants’ outlook, registered a record low, with “the economy, labor, wine substitutes and water availability” cited as contributing factors.
Trouble is not exclusive to producers, however, as target markets are also being pinched. According to Chris Bitter, Ph.D., senior wine and grape analyst with American AgCredit’s analytics firm, Terrain, “It is expected to be a challenging year for the wine industry,” as “wine consumers are clearly facing headwinds in the form of high inflation, rising interest rates, declining asset values, and economic uncertainty.”
Wineries need cash to operate, and they need banks that understand their business model. The underlying threat of potentially contagious liquidity issues is ominous, and whether instigated by bank runs or the result of poor risk management, the results are the same.
“The big problem is the psychological spillover effect,” Gilinsky warned, “California has been through a series of societal shocks, from fires, droughts, floods, to pandemics, economic changes and political upheavals.”
Highlighting a theme as old as the financial industry itself, and one that perfectly sums up the events of the past week, he concludes: “Investors and consumers don’t like uncertainty.”