A rule of thumb with companies in trouble is that the first estimate of the losses is always the most optimistic. As the board and management (or administrators) delve deeper into the mess, the losses almost always mount up. It happened at HIH, at One.Tel, and at a host of other failed groups (car parts group Ion comes to mind).
Winemaker Evans and Tate isn’t at that stage yet, but it can’t be too far away. Already the first estimate of losses (around $8 to $10 million) has proven well short of the mark and that number will at least double as investigations continue into the company’s huge debts, overblown stocks of wine and vanishing cash flow.

Profits are absent as well, which begs the question: is Evans and Tate’s future about to worsen even further?

The struggling wine group is facing millions of dollars more in asset write-downs, there won’t be a dividend, and there are questions whether the ANZ Bank’s lifeline of $10 million be enough to keep it afloat on the sea of wine it has sloshing around its bottles, vats and tanks.

Debt sits at around $100 million and the company clearly doesn’t have enough cash flow to service that. And the write-downs of wine stocks and intangible assets that are coming will increase the company’s gearing to crippling levels and the interest payments will become onerous, if they can be made.

If the company is to trade out of its problems its major lender, the ANZ Bank, will have to agree to restructure the debt and perhaps to take a haircut on its loans. On present indications, the company’s future is under a cloud, especially after yesterday’s shareholder update which confirmed a $4.3 million write-down in the value of the Oakridge vineyard purchase, at least $16.5 million in stock write-downs, up to double the previous estimate, with the possibility of more to come. And there will be as yet unquantifiable write-downs in the value of intangible assets.

The International Wine Investment Fund sold down its shareholding to under the 5% reporting limit earlier this month, a significant desertion. The ordinary shares finished around 30c Wednesday morning, the preference shares 35c and looking weak. Even at these levels, the values are optimistic.