Cannabis Industry Chart Of The Week: The Cost Of Cannabis Debt - The Gap Grows

As debt raises continue to increase for large and smaller operators, Viridian has calculated an “effective cost” analysis to truly arrive at cost of capital for borrowers. Our calculation explicitly values all embedded options including convertibility and any warrant coverage. We also take into account Original Issue Discount and amortization features as well as any mandatory premium liquidation price. The “effective cost” is the yield to maturity based on issue price less option values.

• We calculated the effective cost for every deal in the last twelve months where we had sufficient data for the calculation and then calculated the weighted average effective cost in each of several issue size categories.

• The graph clearly shows that the bulk of the capital raised over the LTM period was in issues of over $200 million. As issue sizes goes up, the weighted average effective cost declines.

• The smallest issues of less than $10 million have an effective cost of approximately 23% while the largest issues average about 11%. The largest MSOs like Green Thumb are now able to issue debt at around 9-9.5% effective cost. 

• We expect to see significant reductions in the effective cost of debt as banking reform and federal legalization evolve.

• We believe that companies should be increasing their use of lower cost debt capital, especially given the availability of low prepayment penalties. 

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis and hemp industry. Each week the Tracker aggregates and analyzed all closed deals and segments each according to key metrics:

• Industry Sector (one of 12 sectors, from Cultivation to Brands)

• Dollar value of the transaction

• Region in which the deal occurred (country or U.S. state)

• Status of the company announcing the transaction (Public vs. Private)

• Deal structure (equity vs. debt)

• Key deal terms (Pricing and Valuation)

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy.

 Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.

Photo by Javier Hasse.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.