Sour Grapes Grow in Wine Country Over Tight Credit : Vintners: Dozens of wineries are being forced to reduce staff and lower prices because of new, stringent banking requirements.

When Lou Foppiano walked into the Bank of America office in Santa Rosa last May seeking to renew his line of credit, he was shocked to learn that the line wouldn’t be renewed without major new restrictions.

“They basically said they weren’t going to renew,” Foppiano said. “So much for loyalty. We had been with the bank since 1924 and we owe nothing on our buildings or our land.”

Throughout the California wine industry, dozens of small, family-owned wineries are facing banks with more stringent requirements than ever, forcing them to reduce staff and lower prices. Six notable wineries have filed bankruptcy papers in the last year, compared to virtually none over the last five years, industry analysts say. Other wineries are on the ropes.

The main problem: declining wine sales and a huge surplus of wine that has driven prices down, devaluing the inventory at wineries. As inventory is devalued, banks pressure wineries to sell their goods at lower prices. The lower prices are already showing up on store shelves.

A number of winery owners admit that the banks aren’t being that unreasonable, considering the conditions these days in both wine and banking. But the long-term effect, some industry analysts say, is that wineries could be forced to sell off land for residential development.

“The wine industry is very, very ill,” said Gary Sbona, president of Regent Pacific Management Corp., a Cupertino-based firm that specializes in assisting California wineries in financial trouble.

The list is growing. Two weeks ago, Hanns Kornell Champagne Cellars in the Napa Valley, founded in 1953, filed for Chapter 11 protection of the bankruptcy court to avoid foreclosure by Napa Valley Bank.

In October, Grand Cru Winery in Sonoma Valley also filed bankruptcy papers after Bank of America demanded payment of a loan.

One wine industry executive said many wineries’ lines of credit will come due Dec. 31, and he expected more bankruptcies to follow.

The fiscal crisis in California’s wine industry became apparent a year ago, when Vintech of Santa Rosa, a limited partnership, placed its four wineries in bankruptcy after capital dried up. Since then, Jekel in Monterey and Mazzocco in Sonoma have gone through foreclosure sales and reverted to their original owners, while the Laurier and Lyeth wineries are up for sale.

Last week, officials at Charles Shaw Winery in the Napa Valley met with Napa Valley Bank in a last-minute bid to head off a foreclosure sale on Wednesday.

Sbona, assisting in the Shaw negotiations, said he hoped to avoid a bankruptcy filing that would block the foreclosure sale.

Both Kornell and Grand Cru remain in business as they reorganize, but industry analysts say finding new sources of revenue is going to be tough.

“We have to look at this in terms of the consolidation in the (wine) industry,” said John Fisher, a wine industry specialist with Hambrecht and Quist, the San Francisco investment banking house. “Banks have a growing commitment to fewer small borrowers on their books, and what we’re seeing is the atrophy of weak brands.

“Brands with strong marketing and distribution will be fine, but the industry appears to be consolidating and the marginal players are being squeezed,” Fisher said. “We expect to see more Chapter 11 filings, more breakups and more sales, especially if this recession continues.”

Foppiano, who admitted that his winery lost money in 1990 for the first time in “many, many years,” eventually solved his crisis, obtaining a line of credit from North Coast Farm Credit Services, “but I had to sign more papers than I have ever seen.”

“That should tell you something,” said Mike Jalone, loan officer for Bank of America’s Santa Rosa branch, which handled the Foppiano loan. “Banks are adding more stringent conditions to loans these days.”

Jalone, who said bank policy prohibits discussion of specific cases, says the bank never declines to renew lines of credit, “but we occasionally change the rates, terms and conditions,” demanding more guarantees of repayment to secure new loans.

Jalone denied that Bank of America is pulling back from the wine industry. He said his office has just as many wine industry clients--”at more favorable rates” and with fewer guarantees required--as existed five years ago, when the wine industry was still growing.

However, Sbona said his client base now includes six wineries that need help, and he has heard of at least another dozen in severe financial trouble.

One of those was the 79-year-old Louis Martini Winery. The Napa Valley institution had been with Bank of America since its founding.

Four years ago, Martini set up its own marketing division. It was an expensive decision, and earlier this year, bank officials looked at that division “and told us, ‘We don’t think that’s working,’ and we agreed, it wasn’t,” President Carolyn Martini said.

Martini fired its 11-member marketing staff and signed an agreement with A. Racke, owner of Buena Vista Winery, for marketing services. “It’s been a good decision,” she said.

“They (Bank of America) want this merger with Security Pacific, so they have to get their loan portfolio looking really spiffy,” Martini said. “They got their ducks in order a year earlier than a lot of other banks, and what they want to do now is return to their strength, which is large commercial loans. I don’t think they really want a lot of Podunk farmers on their books.”

Martini said the move was “smart” from the bank’s perspective, adding that the institution has treated her winery fairly. “Even if we didn’t always like to hear what they had to say, they usually were right,” she said.

Fisher of Hambrecht and Quist said the strongest brands with the least debt--the upper quarter of the industry--remain healthy; the rest are having “various degrees of difficulty.”

Jon Fredrikson of Gomberg, Fredrikson and Associates of San Francisco said wineries “that were never on strong financial footing are the ones that are in trouble.” In Kornell’s case, he said, the winery lost a key contract to supply wine to United Airlines, which torpedoed 1990’s anticipated income.

At its peak, Kornell produced 80,000 cases a year. Production is now well below 40,000 cases and shipments are even less, he said.

One industry observer, who asked for anonymity, said, “Frankly, I think the banks have been way too patient. They should have gotten out of a lot of loans before this.”

Sbona likens himself to a heart surgeon as he goes about his business of helping unhealthy wineries. The signs of a heart attack are there now for the industry, he says, and early detection is the best solution.