Q&A With Leaders in Wine Law

Katherine Philippakis was one of the wine law experts to provide comments on what the tariff war means for the wine industry and how bankruptcy and debt restructuring laws come into play for struggling businesses amid declining demand in some markets.

Read the full Q&A here (subscription may be required).

Excerpts of Katherine's responses:

What legal avenues are available to mitigate shifting policies on tariffs, trade and import-export regulations?

Fortunately, most of the wines produced in the United States are also sold in the U.S. Wineries have an export presence, but generally it is a relatively small volume of their sales. Thus, for most U.S. wineries, the easiest solution will be to focus on expanding domestic markets – particularly through direct-to-consumer channels – and pulling back exports from any markets subject to tariffs.

For foreign wineries importing into the U.S., they should consider creating a U.S. presence through acquisition of domestic properties and/or brands. This would allow foreign producers to reclassify certain of their products as domestic goods, which would be exempt from tariffs. A variety of foreign wineries have established U.S. brands in the past and have done well with them (for example, Mumm Napa), and this also gives foreign wineries diversification of investment portfolio, moving some of their assets and out of foreign markets.

In addition, given the need to signal broad “alliance” with new U.S. trade policies, international producers can seek special free trade agreements that grant mutual tariff-free imports and exports on similar products. Similarly, wineries both domestic and foreign can form lobbying alliances and trade associations to advocate on their behalf. As many wineries are relatively small businesses, they would find strength in numbers by aggregating their voice in the political arena.

With the wine industry facing oversupply and declining demand in some markets, how are bankruptcy and debt restructuring laws coming into play for struggling businesses?

Generally, wineries will want to avoid bankruptcy wherever possible. In past economic downturns, lenders have generally been fairly liberal with borrowers, renegotiating covenants and extending loan terms. In this down cycle, with interest rates considerably higher than they were when most current loans originated, lenders are more likely to move delinquent borrowers to their special assets division. This often results in a sale of the winery in question through a form of arm-twisting. In other words, a lender will tell a winery to put itself voluntarily on the market or face foreclosure proceedings. In these situations, wineries often have little leverage to oppose such measures.

That being said, for wineries who do find themselves behind on loan payments or in violation of loan covenants, talking to their lenders early generally produces better results. There can be an inherent human tendency to avoid a difficult conversation with one’s banker, but in our experience, those who approach their banks earlier tend to have better outcomes. The reality is that lenders do not want to foreclose on operating wineries, and they will try to work with their borrowers.

For those who do know that they are facing difficulties and are likely to have to sell, seeking the advice of a distressed investment banking group can also be a viable path. Some such groups have specific expertise in the wine industry and can help seek additional equity investments, help renegotiate and restructure loans, and help with a sale of assets should that become necessary.