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Drowning Their Sorrows: The Potential Fallout on the Wine Industry from the SVB Collapse

Drowning Their Sorrows: The Potential Fallout on the Wine Industry from the SVB Collapse
March 17, 2023
Dylan Dittrich

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The potential impact of the Silicon Valley Bank collapse on the tech, biotech, and venture capital industries was well understood, but there's another industry that was similarly awash in uncertainty over the weekend: wineries and vineyards.

SVB offered commercial banking and lending solutions to such businesses, predominantly but not exclusively in Napa Valley, relying on sector expertise to best serve the unique needs of businesses new and old. As of the end of 2022, the bank had $1.2 billion in loans outstanding to premium wineries and vineyards, comprising about 2% of the bank's total loan book.

While the winery loans were incredulously cited by some critics as an example of ill-conceived strategic decisions taken by the bank, this crisis was of course not a wine-driven calamity at all. Still, like thousands of other business owners, many family vineyards were left in limbo, awaiting a resolution.

The worst was prevented on Sunday, as the Fed communicated that depositors - both insured and uninsured - would be protected, ensuring that payrolls would be met and employees largely undisturbed. Clients like Chateau Montalena, Darioush, and Hirsch Vineyards (listed on the SVB website) are well-established in the high-end trade and on the auction scene, likely providing further insulation from grave outcomes

.Still, perhaps the great vineyards of tomorrow are losing a partner and advocate, depending on the outcome of any potential SVB acquisition or standalone operation. It's fair to wonder what a potential acquirer of SVB's premium wine loans might think about the future prospects in that business. Given the stigma and the general tumult in the banking industry, banks more broadly may reassess the merits of winery lending, "fair" or not.

Notably, SVB was not the largest lender to the US wine industry, a title held by American Ag Credit according to Wine Business.

This stick in the spokes of the California wine financing system comes on the heels of strong recent performance for California wines on the secondary market. The Liv-Ex California 50 index is up 29.9% over the last two years, though that index of course focuses on regional juggernauts, rather than upstarts. Similarly, California's share of transactions on Liv-Ex has risen from 1% in 2017 to a peak of near 8% in 2021 before dropping to 6% in 2022. It's unlikely that the established constituents on that marketplace and in those indices will see distress amidst potential changes in banking appetite, but the unique capital needs of developing vineyards may be challenged.

Another potential casualty? Thought leadership. SVB's wine division founder, Rob McMillan speculated about the future of the bank's benchmarking data, its unique database of winery financial statements for peer group analysis, and its State of the Industry reports.

Those concerns are noteworthy, but ultimately secondary. The California wine industry employs 422,000 people. Hopefully, disruptions to capital flow are minimally disruptive to employment, and great vineyards of tomorrow find a path to prosperity. Cliché, but we'll raise a glass to that.

Thus far, particularly now that depositors have been protected, it seems fallout on companies operating in other industries with collectible alternative asset ties will be limited. There are, however, additional concerns around the bankability of crypto-centric businesses in the wake of the Silvergate and Signature Bank seizures; both were widely-used in the crypto space. The news has been bullish for Bitcoin though, which is now up over 22% since Friday.

Undoubtedly, the discourse of the last week will have driven many wine and whisky collectors to consider tapping their prized investments. With the most traditional and fundamental concepts of value storage cast in doubt, they just might want to hold off.

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