A cellar worker checks Cabernet Sauvignon grapes before it enters a sorting machine.
Silicon Valley Bank lent over $4 billion to wineries in the past 30 years, according to its website.
The bank understood the unique needs of the industry, a winery estate owner told Insider.
But the bank’s “governance” and “internal strategies” always remained a mystery, he said.
For the past 20-odd years, Silicon Valley Bank was a great banking partner for CADE Estate Winery, a Napa Valley-based company with four wineries, multiple vineyards, and California Gov. Gavin Newsom as one of its investors, founder John Conover told Insider.
The bank seemed to understand the unique demands and challenges of the industry, offering low-interest rate loans, “seasonal crop lines of credit” and “equipment loans and debt restructuring,” according to SVB’s website.
So when the bank collapsed this week after a run of $42 billion in withdrawals, tech start-up founders and VCs weren’t the only cohorts shocked by SVB’s demise.
“I think it surprised everybody,” Conover said.
A large portion of SVB’s clientele came from the startup ecosystem, but it also established a good footing with the west coast’s wine industry. In 1994, the bank created a wine division, founded by executive vice president Rob McMillan, who was sympathetic to the fact that wineries don’t make money in their infancy.
“It’s all spent on stuff,” he told The Wall Street Journal in 2019. “We’ll make real-estate loans typically with a bit of a development period because you don’t have any cash flow generated by the vines for three to five years. The next biggest part is inventory. Then there’s acquisitions and miscellaneous items: You might need to finance your French oak barrels.”
In a 2013 interview with Wine Business, McMillan said the bank allowed clients to lease barrels though it was a “seldom” practice. McMillan did not immediately respond to a request for comment.
Since the division’s founding nearly three decades ago, SVB has loaned more than $4 billion to its wine-centric clients, according to the bank’s website.
It’s a relatively small portion — about 5% — of a $73.6 billion loan portfolio, according to the bank’s 2022 fourth-quarter earnings report. But that five percent includes about 400 clients in the industry, according to a 2018 Wine Business report, and thousands of wineries are now locked out of their accounts, according to The San Francisco Chronicle.
During the Glass Fire, which burned more than 67,000 acres in Napa County in 2020, Conover said the bank was “more flexible” with loans even when the winery had to slow down production and temporarily focus on white wine, which made up about 15% of CADE’s usual production at the time.
“They were good partners with us,” he said. However, the bank’s overall “internal strategies” and governance remained a mystery to many clients, including Conover.
On Wednesday, SVB Financial Group announced it was in a cash crunch that caused panic among customers and a massive $42 billion bank run.
Conover said CADE has a “large loan” and mortgage with SVB on four wineries and five vineyards. And as of Saturday, the company’s checking account “is locked up.”
“I’ve never been through this before,” Conover said. The only similar crisis he could recall was during the 2008 recession.
Conover said he’ll still be able to make payroll for now and has since had four banks offer to buy up CADE’s debt. Years of experience in an already volatile industry have helped him not to panic in this situation, he said. “At this point, there’s no reason to panic,” he said. “We’ll get through.”
Kendra Kawala, the co-founder of Maker Wines, which is based in the Bay Area, told The Chronicle that while she’ll be able to pay her employees, the bank’s closure does make her worried about the overall financial health of the industry.
The Federal Deposit Insurance Corp. (FDIC) announced Friday it will establish a new bank to protect insured depositors and will open no later than Monday. Clients with no more than $250,000 are protected by FDIC, and the agency said it will pay an advance dividend to uninsured accounts over the course of next week. It’s unclear when those accounts will be able to retrieve all of their money if at all.
“There’s just so much unknown right now,” Conover said. “We’ll find out more on Monday.”