WineInk: A wine bank collapses

Last month, this space featured a story on how a report from Silicon Valley Bank in California warned of headwinds for the wine industry. Little did we know that perhaps the strongest of those headwinds would blow from the direction of the very bank that issued the report.

No doubt you know that Silicon Valley Bank (SVB) cratered last week on Friday, March 10, making it the second-largest bank failure in American history. Federal regulators took over the assets of SVB following a classic run on the bank, as depositors — amped up by nervous venture capitalist investors — rushed to withdraw their funds, causing an untenable imbalance in the stability of the bank.

The initial focus for the media, and rightly so, was the immediate effect on technology and health-care companies that made up the vast majority of SVB’s client base. The bank was one of the leading sources of funding and capital for many Silicon Valley startups, and there was concern that these companies would not be able to fund their upcoming payroll and pay bills.

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But in addition to being a critical financial source for the tech industry, SVB was a key player in the wine business in America, as well. Around 2% of SVB’s loan portfolio consisted of wineries, and hundreds of wine entities had deposits and did their day-to-day banking with the failed bank. In fact, the standard description often used to portray SVB’s relationship to the wine industry is that it was the “go-to bank” for wineries and vineyards.

Last weekend, prior to the announcement by the federal government that it would be enacting emergency measures “guaranteeing all deposits” on Monday morning, there was an unprecedented sense of fear and panic, as many wineries were shut out of access to their accounts. While the news of the guarantee was reassuring, there remains a high level of uncertainty for much of the industry going forward about the void that the situation leaves in terms of the ability to access credit and raise needed capital going forward.  

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SVB’s Wine Division was founded nearly 30 years ago under the auspices of the bank’s executive vice president, Rob McMillan, who is a noted and respected adviser to the wine industry. He is the author of the aforementioned annual “State of the Wine Industry” report that tracks trends in wine and is widely read among members of the wine community.  

Since its introduction in 1994, SVB’s Wine Division has provided clients in the wine industry over $4 billion in funding. It was reported that SVB currently has in excess of $1 billion in outstanding loans related to wine clients, ranging from the Napa Valley to Washington state, and that as many as 400 wineries are clients.

On the SVB Wine Division website, one can see the logos of well-known wine customers, including: Chateau St. Montelena, Darioush, Ram’s Gate, Hirsch Vineyards, and Cirq. There is photo of wine legend John Trefethen, founder of Trefethen Estates, on the site, and when SVB’s Wine Division opened their offices with over 30 employees in downtown Napa in 2018, Trefethen was quoted: “Silicon Valley Bank is deeply embedded in the wine community. They’ve been an unwavering partner to us at Trefethen and support their clients through unforeseen challenges — like the Napa earthquake and fires. This new Napa office further underscores their commitment to the wine industry and the community as a whole.”

Indeed, many in the industry have had good things to say about the bank in the wake of its failing. In a very personal post on his Clarice Wine Co. website, Adam Lee, who was in Aspen this past January pouring Clarice wines at the Pinot Posse event, wrote: “For me, Silicon Valley Bank was and will always be what a bank should be for a small business. They were my partner, and they helped me grow and become all that I could be. That’s what I wanted and needed out of a bank. I know that I wouldn’t be where I am without what their employees did. And for that I will always be grateful.” He went on to write about his early experiences with SVB when he and his then wife started the Novy Family Wines and Siduri Wine brands with the support of the Wine Division.

While every business is unique, the wine industry has several factors that make it particularly challenging. Start with the fact that wine is based on an agricultural product, grapes, which are susceptible to the vagaries of farming. It is an industry sensitive to climate change, and as we are seeing more frequently, the disasters that come with it. Insurance is becoming both harder to come by and more expensive. Then there is the way in which wine is held for aging before sales are actually made. How do you value a product sitting in a cellar and will not reach the market for two or three sales cycles down the road? For many wineries, dealing with these challenges requires a bank that is flexible with its lending and understands the needs of the industry.

To be sure, SVB was not the only source of funding for wineries. First Republic, another California bank, touts its relationship with the industry and offers loans and “evolving lines of credit and vineyard development financing to individually tailored working capital lines, stock-secured loans, and other flexible financing options.” Their website features testimonials from clients, including Davis Phinney, founder of Orin Swift Cellars and The Prisoner, one of the most successful brands in wine.

But there is little doubt that the experience, industry focus, and capital that the SBV Wine Division brings to the table would be greatly missed in the industry if it were to shutter. As of this writing, there are options on the table that could prove viable.

“We’ve been listening to parties interested in buying the full Wine Division,” said Rob McMillan on Monday in a blog post about the current status. “Thus far there are seven 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 the most serious crises for SVB wine-industry customers have been avoided for now due to the intervention of the FDIC and the guarantee of deposits, uncertainty and concerns remain.

Just as they do for all of us.