Cannabis Industry Chart Of The Week: The Great Cannabis Debt Shift

There has been a significant shift in cannabis debt issuance from equity-linked debt to straight debt with no equity linkage. This shift reflects the industry's growing maturity and profitability (at least in the U.S.)

• There has been a significant shift in cannabis debt issuance from equity-linked debt to straight debt with no equity linkage. This shift reflects the industry's growing maturity and profitability (at least in the U.S.)

• The graph shows cannabis debt issuance since 2018. The light green bars represent debt that is either convertible or has warrant coverage of greater than 20%. The dark green bars represent straight coupon debt with no equity linkage.

• In the early debt days of 2018, nearly all cannabis debt issues were convertibles, and many issues had additional attached warrants to achieve total coverages of over 100%. High equity participation was required because the companies mainly were EBITDA negative and could not pay interest rates high enough to compensate lenders for taking essentially equity risk.

• As the U.S. MSOs became EBITDA positive in 2020, issuance of straight coupon debt began in earnest, led by the $300M Curaleaf deal in December 2020 and followed shortly after that by $100M and $120M deals by Cresco and TerrAscend, respectively.

• Most of the top MSOs, including Ascend, AYR, Cresco, Curaleaf, Jushi, TerrAscend, Trulieve, and Verano, have now completed straight coupon issues in $100M+ sizes at rates between 8% and 10%.  

• The ability of Acreage Holdings and Glass House Brands, which the Viridian Capital Advisors Credit Tracker ranking system views as significantly weaker credits, to issue debt with no or little equity linkage is somewhat more surprising but explainable. The key is that in a credit market starving for yield, the Glass House issue is priced at 890 basis points over treasuries, nearly 200 basis points wide to the B of A CCC high yield index. Investors are being paid a sizeable premium for taking cannabis risks. We believe the top-tier cannabis credits are better than CCC.

• Where is cannabis debt headed long term? The development of the U.S. High Yield market is instructive: 

  • Credit ratings are fundamental to the development of the market as many funds have limits to the amount of unrated debt they can hold. An augmented Safe Act with cover for up-listing to major U.S. exchanges is probably a prerequisite for this.

  • Standardization – Loan/bond structures, documents,  and covenants will become more standardized as they did in High Yield in the mid-1980s, facilitating trading liquidity.

  • Bifurcation – As in High Yield, larger Issues will migrate towards the public capital markets through public or 144A issuance. Issues less than $100 million will remain the providence of private placements and financial institution underwriting.

  • Derivatives – CDS and more listed equity options will facilitate credit hedging

  • Transparency – public and private debt trades will be TRACE-eligible, providing market transparency on trading levels and spreads.

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

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.

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