MSO Financial Health: Debt Restructuring Vs. Equity Raises – Analyst Digs Into Spreadsheets

The recent equity raises by Canopy Growth CGC and Columbia Care CCHWF have sparked curiosity about which multi-state operators (MSOs) may follow suit.

In its latest report, Zuanic & Associates (Z&A) delves into the financial net debt metrics of 20 MSOs to identify potential candidates for equity raises or debt restructuring.

According to Pablo Zuanic, chief analyst at Z&A, two MSOs, Trulieve ($631 million),TLRY and Curaleaf ($489 million) CURLF stand out with the highest net debt among the group. However, it's essential to consider this in the context of their sales, EBITDA and operating cash flow, as these factors determine their ability to service debt.

Join us at the Benzinga Cannabis Capital Conference in Chicago on September 27-28, and meet Pablo Zuanic. Explore the financial metrics of Multi-State Operators, equity raises, and debt restructuring in the cannabis industry.

Financial Net Debt Metrics

In terms of net debt to sales (2Q23 annualized), StateHouse (1.24x), Vext (0.95x), iAnthus (0.94x), Acreage (0.92x) ACRHF, AYR (0.81) AYRWF, and Schwazze SHWZ (0.8x) have the highest leverage ratios.

Regarding net debt to EBITDA, some companies, like iAnthus, StateHouse, 4Front, Tilt, Vext VEXTF, and Acreage, exhibit multiples above 5x, indicating over-leverage.

“EBITDA margins widely across the group. At the top, we have Green Thumb (36%) GTBIF, Verano (35%) VRNOF, and Schwazze (33%). EBITDA calculation methods can vary among MSOs. In 2Q23, the lowest EBITDA margins were at Planet 13 (-2%) PLNHF iAnthus (-1%) ITHUF, StateHouse (3%), Tilt (4%) TLLTF, and 4Front Ventures (6%) FFNTF. The low margins for some, or negative margins, distort debt to EBITDA multiples,” Zuanic explained.

Most MSOs report operating cash flow below EBITDA, resulting in high net debt to operating cash flow ratios. Some even generate negative operating cash flow.

For those with positive operating cash flow, ratios range from 67x for AYR to 10x for Tilt.

A Broader Definition Of Net Debt

• The report expands its scope to include income tax payables, gross leases, and warrant derivative liabilities in its definition of net debt, revealing that Curaleaf ($1.24Bn), Cresco ($692Mn) CRLBF, and Trulieve ($679Mn) TCNNF hold the highest absolute "broad" net financial debt.
• Companies like 4Front Ventures and StateHouse STHZF have ratios above 1x broad net debt to sales, signaling high leverage.
• When viewed relative to EBITDA margins, several MSOs, including Acreage, Ascend Wellness AAWH, AYR, Columbia Care, 4Front, iAnthus, Jushi JUSHF, StateHouse, and TerrAscend TSNDF, present a higher probability of needing equity raises.
• Columbia Care has already initiated a $25 million equity raise via private placement, highlighting the urgency for some MSOs to address their capital structure.

Debt Restructuring And Net Interest Costs

The cannabis industry is navigating a complex financial terrain, with MSOs facing varying degrees of debt leverage. While equity raises seem like a potential solution, it's important to acknowledge that not all MSOs may have access to this avenue.

Low valuation multiples and lack of investor interest could limit their options, leaving debt restructuring as the only alternative.

For some MSOs, net interest expenses already account for a significant portion of their sales.

In 2Q23, net interest expense as a percentage of sales ranged from 38% at Goodness Growth to 10% at several other MSOs.

Equity raises may be the lifeline for some, while others may need to explore debt restructuring options.

The maturity profile of debt and the potential for sales growth, EBITDA margin expansion, and operating cash flow improvement are factors that also require consideration in assessing each company's risk profile.

“Debt restructuring may be an option, but high net interest costs for some MSOs pose a significant challenge. Limited access to the equity path due to low valuation multiples or investor disinterest could leave debt restructuring as the sole alternative,” Zuanic wrote.

“Notably, several companies already allocate a substantial portion of their sales to cover net interest expenses, with figures such as 38% for Goodness Growth, 19% for StateHouse, 15% for Acreage and Jushi, 13% for Tilt, and 10-11% for TerrAscend, Columbia Care, Cresco, 4Front, and iAnthus, as per 2Q23 filings,” he added.

The Benzinga Cannabis Capital Conference, the place where deals get done, is returning to Chicago this September 27-28 for its 17th edition. Get your tickets today before prices increase and secure a spot at the epicenter of cannabis investment and branding.

Photo by Gerold Hinzen on Unsplash.