Why Gundulach Bundschu Winery Files for Chapter 11 Bankruptcy Protection

Gundlach Bundschu winery, reportedly California's oldest continuously family-run winery, has filed for Chapter 11 Bankruptcy Act protection. It owes more than $37 million and claims assets of $17.2 million in cash and property.

The largest creditors are American AgCredit, owed $8.8 million, and Tiverton Advisors, LLC, owed $18 million but "disputed" and listed at $9.4 million (secured creditors total $35.5 million). The winery will remain open and operating throughout the process as it seeks to restructure its finances with the assistance of a possible new investor.

Betting on Future Growth

The immediate cause of the bankruptcy is its acquisition of Valley of the Moon Winery in 2020, “immediately before COVID-19 restrictions disrupted tasting room and hospitality operations company-wide." The 60-acre property was purchased from West Coast Wine Partners owned by the Stewart Family. Terms weren't disclosed.

The family expected the acquisition to create a stronger platform, but “the growth required to support that investment did not materialize,” court documents said. Those challenges were magnified by changing consumer behavior, declining demand, distributor consolidation, excess inventory and reduced demand for contract production and grapes. 

A safe leverage level for a winery typically falls within a debt-to-equity ratio of 0.4 to 0.7. A study by FullRatio shows the average ratio for wineries and distilleries is 0.51. On a debt-to-EBITDA basis, 2x to 3.5x is considered a safe ratio. while a safe ratio on a total debt-to-total assets basis is generally considered 0.2 t0 0.4.

Attempts to Avoid Bankruptcy

The Bundschu family committed substantial personal assets to support the business and meet its obligations, they said in a press release, including pledging and liquidating real estate outside the winery, including the patrimonial family home, which is at risk to lenders. The original home was built circa 1900 but was destroyed in the 2017 Tubbs Fire and rebuilt.

Over the past 36 months, the company has reduced expenses by more than 40% (approximately $6 million), but remained too highly leveraged for the market environment.

The Bundschus attempted a negotiated solution before seeking Chapter 11 protection, they said, but lenders wanted to extend the company millions of dollars more at an onerous cost of capital.

Already heavily indebted, the family concluded that additional high-cost financing would not address the winery’s underlying financial condition and rejected the proposal in search of a better solution for all stakeholders. Prior to the filing for reorganization, the family and advisors successfully solicited multiple acquisition proposals. 

A Painful Change

For the Bundschu family, the filing marks a painful change after six generations of ownership, but not an end to the winery’s role in Sonoma.

“Our family has been entrusted with this land for six generations. We are fighting for the opportunity to help ensure that the seventh generation — and the Sonoma Valley community that has grown alongside us — has a future here, Bundschu said.  “This has never been only about a winery. It is about a place, a legacy and a community worth preserving.”

Comment

This is a painful time for the Bundschu family, and they aren't the only ones who found themselves with too much debt in today's environment. This week's interest rate increase by the Federal Reserve and the increases to come will result in additional financial distress not only in the wine business but also in the real estate sector more broadly.

In a repeat of the 1980s, apartment owners in the Southeast are already finding themselves overextended, and we will see more bankruptcies and restructurings there.

At the risk of sounding like a religious nut, after six decades of business reporting and editing, I've become convinced that St. Paul ("Owe nothing to anyone except to love one another"), William Shakespeare ("Neither borrower nor lender be") and Benjamin Franklin ("He that goes a borrowing goes a sorrowing")knew what they were talking about.