Let's hear it for export financing - financing program for California wines

A number of obstacles exist in the development of foreign markets for California wines. Perhaps the most visible are the trade and bureaucratic barriers imposed by foreign governments. Yet a less obvious but very important obstacle is the scarcity of trade financing for wine.

The availability of trade financing allows wineries to ship greater depth and breadth of product line. Volume, with its consequence of continuity, helps to create market presence. The ability to provide distributor/retailer credit can mean the difference between a one container order and a ten container order.

Portsmouth Financial Services, San Francisco, working with a European banking group, has developed a short-to medium-term (1 to 7 years) financing program for wines shipped to Western Europe, Canada and Japan. Other countries may be added in the future.

Program structure is based upon discounting the FOB value of the wines; the discounted value being paid to the winery at time of shipment. The discount amount essentially underwrites, on a present value basis, the importer's cost of carry. The discounted value is determined by prevailing interest rates, the financing term (years), the importer's target margin, and which entity, importer or winery, absorbs transportation, taxes and storage.

Another factor affecting the discounted value is the historic retail price appreciation of the winery's products. Because this trade financing is fixed rate, any price appreciation can be viewed either as enhancing the importer's margin or reducing the winery's discount.

For example, let us examine a winery providing 5 year financing to a direct retail importer whose target margin is 33 1/2%. If the winery can demonstrate to the importer that the wines will appreciate 14% per year, no discount would be required to underwrite the financing. However, if the winery can show no history of price appreciation, a discount in the range of 20% would be needed. Examples of four discounting situations are attached. It is important to note that these examples are based on today's interest rates and do not address taxes, transport or storage costs.

Importers would pay for the wine purchases in fixed, semi-annual installments. In most cases, a bank guarantee issued on the importer's local bank insuring installment payment would be required. However, bank guarantees may be waived if the importer is a government agency or large corporate entity. Cost of the guarantee is a function of the importer's credit, usually computed on the bank's loan rate less cost of funds. (TABULAR DATA OMITTED)

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