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‘Wine Loans’ Squeeze Liquidity from Your Cellar

Izabella Kaminska, Financial Times
Thursday, 29 Nov 2012 | 11:00 AM ET
Source: Sotheby's

Somewhere, on the shores of Switzerland's Lake Léman — not far from the famous Geneva jet d'eau — is a high-security warehouse facility so robust and so discreet it's hard to distinguish from the sort of vault that usually stores gold bullion.

Yet for Stephen Burton, the founder of wine brokerage Bordeaux Cellars, that's not its most exciting attribute. He's keen on the other more bespoke features, like climate control.

"Collectors want to have optimum conditions," says Burton, a former property developer and life-long wine collector who got into the wine brokerage business about two years ago.

As he explains to FT Alphaville he's in town to scope out the facility's potential for warehousing rare and fine wine inventory. Though, not in connection with the brokerage side of his business.

The inventory in question, or "collateral" as Burton describes it, is actually tied to the much faster growing wine-loan side of his business — a service he started in October 2011.

As a consequence, Burton now finds himself in the business of matching the cash rich — those looking for alternatives to low-yielding investments — with the temporarily illiquid (apart from the liquid Chateau Lafite Rothschild they have parked in their cellars, that is.)

"Some people call it pawning, and to be honest we started off describing it as a peer-to-peer service, but now I really prefer to call it collateralised lending," he says.

Wine pawning

Burton came up with idea after reading an article about the booming pawning industry and the rush for high-value security loans against such things as sports cars and art work.

"I thought, why can't we lend against wine? After all it was a lot easier to value a bottle of Petrus than an Aston Martin and with Liv-Ex publishing current market prices across the globe, pricing is very transparent," he says.

But what really amazes Burton is how quickly the business has taken off: "The demand has been incredible, both from borrowers and lenders."

"Sometimes I get a placement, and it's entirely taken within 20 minutes, " he says.

On the lending side, Burton works mainly with rich private investors, a lot of them from Asia — where deposit rates are low, but where appreciation of fine wine is growing by the day. "There are many bankers, many of them retired," he says.

Sometimes they pick up loans individually, other times they form semi-syndicates. The documentation is registered in the U.K. under British law, while all stock is fully delivered to the custody of the lenders .

"That's so there's no risk of the loan being drunk away," laughs Burton.

On the borrowing side, he says most of his clients hail from Europe, but circumstances are varied and unpredictable.

Since starting off he's arranged some £20 million ($26 million) worth of loans.

To his knowledge he's the only specialist in the business, adding that he doesn't consider the less specialized pawnbrokers major competitors because they lend against a much wider range of wines.

For Burton it's Bordeaux, Burgundy and occasionally a rare or collectible Californian or Australian wine only. Think Romanée-Conti rather than Châteauneuf-du-Pape.

Burton says he receives about 30 loan requests per month of which about 20 will have suitable stock to borrow against.

But before any loan is organized the inventory has to be meticulously valued, a process which accounts for storage conditions and ownership record.

Up to 95 percent of the stock delivered comes in original wooden cases, which is important because condition is paramount. "When I visit a private cellar it's vital to ascertain provenance and condition of the wines," says Burton. "We simply will not offer loans on any stock that we can't verify correct provenance and ownership."

"Wine has now become so valuable that most owners are fully aware of the importance of correct storage so I rarely see Chateau Petrus stored in the kitchen wine rack," says Burton.

While there is no such thing as an average loan size, something in the range of £100,000 ($129,000) is probably most common. Loan duration is usually for between 12-18 months, at a rate of 15 percent. Lenders receive 12 percent, while leverage is capped at 35 percent the value of the collection.

"You'd be surprised how many people are out there with a need for short-term liquidity, which the banks just don't want to service, " says Burton.

Yet, it's not just short-term liquidity needs that can be the driving force for a wine loan. As Burton explains, years of asset appreciation mean many long-term collectors want to unlock the purchasing power of their collections.

"Most of them would never want to drink it," he says. "This way they can kind of have their cake and eat it."

It's a point of view that Burton can appreciate.

"When I bought the wine in the 1980s it was never looked upon as an investment," he says. "It's only in the last 15 years that this has become a serious commodity to invest in."

"I look at the very first case of wine I bought and it's still there and I'm never going to drink it."

But demand can also come about the other way around.

There are, for example, more recent investors who got caught in the run-up of 2008 Chateau Lafite Rothschild prices. Having bought at £12,000 pounds at the peak, they now don't feel comfortable selling at £6,000. Thanks to wine loans, they can free up their personal balance sheet as they wait for the market to turn around, says Burton.

With wine prices yet to recover, Burton expects the wine-loan side of the business will remain active for a good while. Hence his prospecting trip to Switzerland to secure more warehousing space.

What he saw there: approximately 80,000 bottles stored behind a 38-ton bank vault door in perfect conditions, he says.

Add that to the space offered by the three largest dedicated wine storage facilities in the U.K. — Octavian, LCB London City Bond and Vinotheque — and you've got the potential for some serious securitization.

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  • A reporter and editor, Robert Frank is a leading authority on the American wealthy for CNBC.