As a restaurateur and wine collector, Nick Gangas knows the special pleasures of pairing a good Burgundy with 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 best French wines for large cash loans on generous terms. Using $ 300,000 from his Domaine de la Romanée-Conti, Chambertin and other wines, he is about to receive a loan of around $ 150,000, which he intends to use to open a new restaurant in the suburbs of Chicago.
The bottles “would just be aging in the cellar,” Gangas said. “Why not use them to raise capital? By the time they are ready to drink, I will have paid off the loan.
For the rich, wine has become the liquid asset par excellence. With the prices of the best vintages exceeding $ 10,000 a bottle, fine wine is bought, sold and auctioned as a new investment class, with its own value indexes, investment funds and speculators. And now wealthy collectors are using wine as leverage – collecting cash to invest in more wine and build even more wealth.
A new generation of wine lenders have started offering collectors cash up to 60% of the value of their collections, with relatively low interest rates. A collector with a collection of $ 1 million can get a loan of $ 600,000, often at an interest rate of 8-10%, a fraction of the average rate on a credit card. In the past two years, wine lenders have issued tens of millions of dollars in loans with wine as the only collateral, according to several lenders.
The main lender is WineCredit, founded by a former Wall Street credit analyst, who took out $ 20 million in loans on 114,000 bottles of wine in the two years since its inception.
“Whether it’s real estate or wine, it doesn’t make sense to accumulate assets with pure money,” said Patrick Stella, CEO and founder of WineCredit. “With wine, you can borrow and not put your house or other important asset at risk. You can finance toys with toys.
There are pitfalls, of course. Wine should be appraised and verified by an expert, and more expensive collector’s wines are generally preferred. Wine should be stored in a licensed and supervised wine storage facility, so as to prevent borrowers from drinking their collateral at a dinner party.
The rise in wine lending is the latest extreme in a history of two credit markets, where many Americans still can’t get a mortgage, but the wealthy in assets are feeling drunk on credit. Banks are eager to extend credit for private jets, multiple homes, art, jewelry, and investments as asset values rise and the wealthy turn out to be the biggest source of borrowing. rich.
So far, default has not been a problem (lenders cannot recall a single one). Still, some fear the surge in wine lending signals the peak of an already expensive collectibles market. Last year, Sotheby’s sold a collection of 114 bottles of Domaine de la Romanée-Conti for $ 1.6 million, or more than $ 14,000 per bottle.
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Wine also presents special financial risks: in addition to being a consumer good (it is basically old grape juice) and notoriously prone to fraud, it can be difficult to sell when others are also trying to sell. empty their collections. Adding money borrowed from a market heavily tied to stocks and wealth cycles could make the ups and downs in wine even more extreme.
“The risk is that when you are forced to be a seller, it usually happens at a time when everyone is forced to be a seller,” said Elroy dimson, professor of economics at the London Business School and co-author of two studies on the wine market. “Prices seem to be stable over time, but when you try to sell, they can be very volatile. “
For now, however, the wine loan is unlocking millions of dollars in the cellars of the rich.
Mr. Stella began 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 business was perpetually strapped for cash. Collectors and restaurants often had millions of dollars in wine in reserve, but banks were reluctant to lend against wine, usually because they didn’t know how to value it.
Mr. Stella has developed a methodology and systematic approach to valuing wine, with a growing database of world prices, buyers, sellers and sales volumes. The system allows him to offer loans with an average interest rate of 8.78% and a loan-to-value ratio of up to 60%, which means that collectors can borrow up to 60% of the value. of their wine. Other wine lenders, such as Borro, typically charge interest rates of over 30 percent per year, and offer loans of 40 to 50 percent of a collection’s value.
WineCredit’s largest loan was $ 1.5 million. Borrowers often prefer to hand over their more expensive Burgundy or Bordeaux so they don’t have to pledge or ship so many bottles. Still, Mr Stella said he readily accepts wines for as little as $ 100 or $ 200 if they can easily be sold or traded.
Since wine must be kept at an approved site for the duration of the loan, the wine loan has resulted in a concomitant increase in wine storage. Field, a wine storage and consultancy company, has five locations across the country with a total of over 1.4 million bottles. Customers who already have their wine at the Domaine benefit from a new advantage: the possibility of borrowing against their wines without additional shipping or storage costs.
Not everyone is approved. Marc Lazar, CEO and founder of the Estate, says collectors who arrive with bad records, untradeable wine or murky stories don’t get loans. “I have seen several transactions on my desk that do not materialize,” he said. “There must be a good written record. “
Borrowers mainly use the money to buy more wine, betting that they can choose the winners who will increase in value, which they can sell to pay off the loan and make a profit, in the same way as buying stocks in margin. Other wealthy borrowers use the money for divorces or tax payments, or to buy a boat or a car. And many wealthy people, especially business owners, have frequent short-term cash shortages.
“The rich never have as much cash as we think,” Mr. Stella said. Of course, turning an age-old drink meant for enjoyment and sharing into a financial instrument can offend many wine purists. It could also push the prices of some wines up out of the reach of ordinary buyers, as the wealthy bid more aggressively on wine with borrowed money.
Still, Lazar said, the wine lending will primarily affect a small group of trophy wines. “There’s still a lot of great juice out there for $ 40 or $ 50 a bottle,” he said.