A peer-to-peer lending opportunity in the wine industry offers sweet returns to the lender, and a solution for asset- rich but cash-poor borrowers.
You need a loan, but banks aren’t lending these days. And you already have a mortgage on your home. So what to do?
Think outside the box – and look at your collections, specifically your wine collection. You might want to think of its potential for collateral-based lending.
And if you are cash-rich, as many in Asia are these days, lending to a wine collector might offer returns you haven’t seen in years.
Holders of fine wines are increasingly choosing to obtain short-term cash from private lenders by putting their collection in custody. They are typically asset-rich but cash-poor borrowers, perhaps who have inherited a wine cellar, but who need cash immediately. They may be reluctant to sell for sentimental reasons and are quite often UK-based.
The lenders are self-certified high-net-worth investors, looking for reliable returns of up to 15%, who understand wine as an asset class.
We talk to Stephen Burton, CEO of Bordeaux Cellars, which has thus far facilitated more than 80 such loans, about the opportunities.
How does this work?
We advertise our services widely inviting enquiries from wine collectors looking to leverage their cellars. They email details of their cellars and I can tell immediately whether or not they represent good security. I value the collection and email the potential borrower an outline offer. This is usually no more than 35% of the current market value as published by Liv-Ex.
A 35% loan-to-value ratio is very conservative and offers lenders a very comfortable margin of security on their money.
Once the borrower accepts the offer I then email the list of wines and headline terms for the loan to our database of lenders. All of our lenders have appointed us as their broker for making loans. When a lender confirms that they are prepared to lend we then send the borrower a facility letter, which confirms the full terms of the loan. When we receive the borrowers signed acceptance and his executed chattel mortgage we inspect the wines to verify provenance and they are indeed as described. We then take physical possession of the wines transferring them to our secure temperature-controlled warehouse. The next step is to request the lender transfer funds so that the loan can be released to the borrower. The final step is to register the chattel mortgage at the High Court in London to perfect the security. We keep regular check on the values of the wines to ensure that the portfolio continues to provide good security.
How popular is this?
We began offering loans in October 2011. To date we have facilitated £10,000,000 in loans. As the liquidity crisis deteriorates in the eurozone and banks are ever more reluctant to lend we’ve seen a steady increase in the number of borrowers looking to raise quick cash against their wine collections.
What’s the minimum amount a lender can lend?
The minimum is HK$300,000.
($38,500). The average loan is approximately HK$1.2 million. Some lenders lend more than once. We have a number of lenders with concurrent loans.
If the borrower defaults on the loan then as stipulated in the chattel mortgage, the lender is entitled to sell the wines to recover the loan, outstanding interest and costs of sale. Any surplus will be passed back to the borrower.
Do you have more potential borrowers than lenders?
Not all enquiries lead to loans as we will only lend on investment-grade wine. We are currently registering approximately 12 loans per month. We have a few savvy high-net-worth lenders wanting to lend on everything as they understand the process and are naturally very happy with the returns. However we are constantly expanding our lender database. When we offer loans to our lenders it’s purely first come first served and most loans are subscribed within 12 hours.
There are a few pawn brokers offering loans against wine but their interest rates are exorbitant — 60% per annum! To our knowledge we are the only dedicated wine brokerage offering this service.
How many lenders are from Asia?
We currently have 30 Asia-based lenders.
Is this a bear-market service, or does it have long-term legs?
It’s the bear market that has created this opportunity. There will always be borrowers who are unable to borrow from conventional sources due to poor credit ratings etc, so I don’t see any reason why this model can’t expand further in time. We may have to adapt with current market conditions of the time and we are not too dissimilar to pawn brokers who have been around for centuries.