Wine Collateral (flame suit on)

WINE TALK
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Full disclosure–I founded WineCredit, as mentioned in the article.

Just to clear a few things up: The home mortgage interest deduction is great, and everyone should take advantage of it, thought I believe it does have some limitations. And further, yes, interest from any loan–including one from us–is deductible, largely, to the extent it is used directly for business purposes. Consult with your accountant, etc.

Second, yes, HELOCs are also terrific and really cheap, and we recommend all our clients to start there if that source is untapped and easily available. If you own your home outright, and you are willing to jump through some hoops–as Marc very accurately described–then by all means, do it. It’s the cheapest form of capital you can get (other than, as someone mentioned, liquid securities). So we are under no delusions about where we are on the spectrum. We should probably be your third choice if, for whatever reason, liquid securities and a fully paid off home are not available. We can offer some advantages in terms of convenience, speed, and discretion, but I agree that rate is most important for most clients.

Just one quick correction: some have said the appearance of easy credit signals the top of a market. That is not what’s going on here. This is the first appearance of any credit, not easy credit. This is like the first mortgage being written–it’s not the peak, it’s the very beginning of the climb. Yes, the introduction of credit will increase prices in wine, just as the introduction of mortgages, at some point, significantly increased the prices of homes by allowing buyers to pay for homes more expensive than the amount of cash they currently held. This is an inevitable development as the wine world grows up and one we are happy to be a part of. It is coming to all assets for which it is economical, sooner or later, and it makes perfect sense for wine. The frothy stage will be when someone is lending 90% LTV against a wine collection at 3% and the inspections are being done carelessly, as with the mortgage market. We’re a long, long way from that point. We have one real lender in the market!

Thanks for everyone’s comments and kind wishes. We hope and believe we’ve been a productive service to our clients. We’ve never repossessed a single bottle of wine or had a single borrower struggle with payments, and we hope it stays that way. We are here to help the wine community with its capital needs, not get anyone in over their head.

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Also, just to be clear, we don’t charge people for appraisals.

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I’ve read that specialist pawnbrokers in the UK will lend against wine. Pretty pricey though I suspect.

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A rising tide floats all boats, as is often said when it comes to investing and lending. Do not be seduced by the positive results in good times. We have gone through a number of down cycles in the lending business in the past 39 years that I have been advising banks, and it seems to me that if (or I should probably say when) the economy turns back down, defaulting on wine loans seems a lot less painful than defaulting on a home loan.

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Patrick/Marc, I’m curious what is the amount of release you grant people ie LTV? Is there an initial release and then a market drift allowance ie with a margin line?

For people in big cities where domaine has storage I think this makes a ton of sense for someone on a short term basis. The scary thing would be to take in fake wine as collateral.

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Libor+100 is a fair rate, but not a great rate. So yes, this is relatively expensive money-but they acknowledge that.

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The one thing I like about this is that it should make it cheaper/easier for restaurants and wine shops to actually age their own wine. It is kind of a disgrace how supposedly sophisticated commercial establishments just sell you recent, not-really-ready-to-drink vintages.

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I would think restaurants are already in effect borrowing against their wine collections, as it is a business asset and business loans generally get a security interest in all the assets. So, apart from the example in the article of someone leveraging a personal collection to raise capital to devote to a restaurant, I wouldn’t think that this credit source would have much impact on the restaurant business.

On the separate subject of tax-deductibility, that may be easier to achieve than the posts above seem to suppose. The article suggests that the primary market for these loans is investors in wine (as opposed to those collecting primarily for personal consumption). If you are actively selling, as well as buying, you could at the very least deduct the interest against gains on wine sold. Since that income would be collectibles gain taxed at 28%, that’s a reasonably valuable deduction. For someone who regularly flips wines, the short-term gains are taxed at ordinary marginal rates, up to 39.6%, and such a person might even have an argument that he or she is a trader in wine, which would (again, arguably) make the interest fully deductible against income from all sources.

– Matt

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I still think when an unmarginable asset suddenly becomes marginable, that’s more a sign of a credit top than a bottom. Financial innovation to me is not a sign of bottomed out markets.

I just look at the bond world and see lots of broken FI Closed End Funds trading at AM radio like yields, which offer transactional entry/exit with the click of a mousebutton. Pretty much any kind of yield wrapper vehicles is this way, so its not like that is an isolated exaple, although its retail nichey. So I can’t even really understand the merits of providing capital into this space.

It would seem to me that the scalable variant of this would be financing of bonded inventory. Presumably the big commercial banks have figured that out though?