Over the past few years,we have seen much in the growth in fine art becoming an asset class. In addition to fine art there are also luxury items, such as cars, watches and fine wines. The NY Times just posted an interesting article on the growth of fine wine collecting and the ability in using the collectible vintages and cellars as collateral for loans.
The article notes that the loan to value ratio of fine wine can be as high as 60% with interest rates in the 8%-10% range, which is not bad. In order to get the loan, the wine has to be properly valued, stored, and monitored in a wine storage facility so the owner does not drink it. Additionally, the wine must be considered collectible. The article notes many wine collectors are taking out the loans in order to purchase and invest in new wine purchases.
The NY Times reports
Source: The NY TimesAs a restaurateur and wine collector, Nick Gangas knows the special pleasures of pairing a fine Burgundy with a roast chicken or a leg of lamb. Yet recently, he discovered another use for his Burgundy — as loan collateral.
Like a growing number of collectors, Mr. Gangas has pledged some of his finest French wines for large cash loans with generous terms. Using $300,000 worth of his Domaine de la Romanée-Conti, Chambertin and other wines, he’s about to receive a loan of about $150,000, which he plans to use to open a new restaurant in the Chicago suburbs.
The bottles “would be just sitting in the cellar aging,” said Mr. Gangas. “Why not use them to raise capital? By the time they’re ready to drink, I’ll have paid back the loan.”
For the wealthy, wine has become the ultimate liquid asset. With prices for top vintages soaring past $10,000 a bottle, fine wine is being bought, sold and traded at auction like a new investment class, with its own value indexes, investment funds and speculators. And now wealthy collectors are using wine as leverage — raising cash to invest in more wine and create even more wealth.
A new crop of wine lenders has started offering collectors cash for up to 60 percent of the value of their collections, with relatively low interest rates. A collector with a $1 million collection can obtain a $600,000 loan, often at an 8 percent to 10 percent interest rate — or a fraction of the average credit card rate. In the last two years, wine lenders have issued tens of millions of dollars in loans with wine as the sole collateral, according to several lenders.
The top lender is WineCredit, founded by a former Wall Street credit analyst, which has written $20 million in loans on 114,000 bottles of wine in the two years since it was founded.
“Whether it’s real estate or wine, it doesn’t make sense to accumulate assets with pure cash,” said Patrick Stella, the chief executive and founder of WineCredit. “With wine, you can borrow and not put your home or some other important asset at risk. You can finance toys with toys.”
There are catches, of course. The wine must be valued and verified by an expert, and more expensive, collectible wines are typically preferred. The wine must be stored in an approved, monitored wine-storage facility, so as to prevent borrowers from drinking their collateral at a dinner party.
The rise of wine loans is the latest extreme in a tale of two credit markets, where many Americans still can’t get a mortgage but the asset-wealthy are feeling drunk with credit. Banks are eager to extend credit for private jets, multiple homes, art, jewelry and investments as asset values rise and the wealthy prove to be the richest source of borrowing.
So far, default has not been a problem (lenders can’t recall a single one). Yet some worry that the rise of wine lending may signal the top of an already pricey collectibles market. Sotheby’s last year sold a 114-bottle collection of Domaine de la Romanée-Conti for $1.6 million, or more than $14,000 a bottle.
Wine also has special financial risks: Aside from being a consumption good (it’s essentially old grape juice) and notoriously prone to fraud, it can be difficult to sell when others are also trying to dump their collections. Adding borrowed money to a market highly linked to stocks and wealth cycles could make the booms and busts in wine even more extreme.
“The risk is that when you’re forced to be a seller, it usually comes at a time when everyone else is forced to be a seller,” said Elroy Dimson, an economics professor at the London Business School and co-writer of two studies on the wine market. “Prices look smooth over time but when you try to sell they can be highly volatile.”
For now, however, wine lending is unlocking millions of dollars from the cellars of the rich.
Mr. Stella started learning about wine while in college at Stanford. After working in the hedge fund industry investing in junk bonds and synthetic credit derivatives, he noticed that the wine trade was perpetually short of cash. Collectors and restaurants often had millions of dollars of wine in storage but banks were reluctant to lend against wine, usually because they weren’t sure how to value it.
Mr. Stella developed a methodology and systematic approach for valuing wine, with a growing database of global prices, buyers, sellers and sales volumes. The system allows him to offer loans with an average interest rate of 8.78 percent and a loan-to-value ratio of up to 60 percent, meaning collectors can borrow up to 60 percent of their wine’s value. Other wine lenders, like Borro, usually charge interest rates of more than 30 percent a year and offer loans of 40 percent to 50 percent of a collection’s value.
WineCredit’s largest loan has been $1.5 million. Borrowers often prefer to hand over their highest-priced Burgundys or Bordeaux so they don’t have to pledge or ship as many bottles. Yet Mr. Stella said he happily accepts wines as low as $100 or $200 if they can easily be sold or traded.
Since the wine must be held in an approved site during the life of the loan, wine lending has led to an accompanying surge in wine storage. Domaine, a wine storage and advisory firm, has five sites around the country with a total of more than 1.4 million bottles. Customers who already have their wine at Domaine are taking advantage of a new perk — the chance to borrow against their wines without any extra shipping or storage costs.
Not everyone gets approved. Marc Lazar, Domaine’s chief executive and founder, says collectors who come in with poor records, untradable wine or murky stories don’t get loans. “I’ve seen several deals come across my desk that don’t come to fruition,” he said. “There has to be a good paper trail.”
Borrowers are mainly using the money to buy more wine, betting they can pick the winners that will surge in value, which they can sell to pay off the loan and make a profit — similar to buying stocks on margin. Other wealthy borrowers are using the money for divorces or tax payments, or to buy a boat or a car. And many of the wealthy, especially business owners, have frequent short-term cash squeezes.
“Rich people never have as much liquidity as we think they have,” Mr. Stella said. Of course, turning an age-old beverage meant for enjoyment and sharing into a financial instrument may offend many wine purists. It could also drive up the prices of some wines beyond the reach of everyday buyers, as the wealthy bid more aggressively on wine with borrowed cash.
Still, Mr. Lazar said, wine lending will affect mainly a small group of trophy wines. “There is still a lot of darn good juice out there for $40 or $50 a bottle,” he said.