I have been following the tale of Arrowood's financial woes for some time, and an article in today's Press Democrat prompts me to finally post about it. The following is a plagiarized condensation of the article with occasional comments thrown in:
The largest bankruptcy case to hit the wine industry in years is shaping up to be a bruising legal battle that could jeopardize the fate of several renowned wineries, including Glen Ellen's Arrowood Vineyards & Winery.
The Legacy Estates Group, owners of Freemark Abbey Winery in St. Helena since 2001, filed Chapter 11 bankruptcy last month, nine months after acquiring Arrowood and Byron winery, in Santa Maria.
The group purchased the two wineries in March from Constellation Brands, using a $53 million loan from a Houston-based hedge fund.
This seems to be the problem... apparently the hedge fund Laminar Direct Capital was kind enough to lend to Legacy when the banks saw little chance of success. Legacy complains that the debt service is "onerous", with interest rates between 11% and 16%... Whoa! how bad did the acquisition look if that was the best deal you could get! Perhaps the move was ill advised?
In its Nov. 18 bankruptcy filing, the company claims it owes $83 million to more than 450 creditors.
Legacy owes $83M to 450 creditors, and all available cash is running toward the debt service of possibly $8.5M annually, it's no wonder that in this cash strapped business the arrival of the growers' bills caused a hiccup pushing Legacy into violation of its "onerous" covenants.
It would seem that Legacy was out maneuvered by a predatory lender who was happy to lend all the money Legacy wanted, with the understanding that if Legacy's financial picture changed, covenants would be violated and the lender could foreclose. (This is of course an assumption)
Legacy could've been so desperate to make the acquisition that they may have accepted a contract so binding that if they had one payment hiccup, Laminar would pick up the company AND get their initial capital back. That's what I call a fire sale!
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