The Changing Composition Of Cannabis Debt

The widespread belief that financing has dried up for U.S. Cultivation & Retail sector companies is not entirely true. Equity issuance was down sharply to only $104M YTD in 2022 from $2.1B in 2021, but luckily, debt issuance has not been as affected.

The graph shows cannabis debt issuance since 2018 on a YTD basis through December 12th. Total debt issuance YTD is down 30% from record 2021 levels. Still, raises are more than twice any previous year. 

What has changed significantly over the years is the type of debt issued. In the early debt days of 2018, most debt issued was convertible debt. In 2019 we started to see convertible issues with additional attached warrants to achieve total coverages 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 and 2021, issuance of straight coupon debt began in earnest, led by the $300M Curaleaf CURLF deal in December 2020 and followed shortly after that by $100M and $120M deals by Cresco CRLBF and TerrAscend TRSSF, respectively. Most of the top MSOs have now completed straight coupon issues, many over $100M in size.

Although overall issuance is robust, 93% of it has been senior secured debt. Debt financing is available only if you have solid collateral coverage, like real estate. Cash flow lending and mezzanine debt are strikingly absent. Perhaps this is a reaction to the industry's current challenges, the lack of legislative breakthroughs, and the impending recession. Alternatively, maybe mezzanine lenders perceive better risk/reward tradeoffs in more settled industries. It strikes us as odd that potential lenders do not more highly prize the embedded options associated with equity-linked structures.

Get Started

Earn 7.2% — No Matter What the Fed Does

Markets expect rate cuts — but your earnings don’t have to suffer. Lock in 7.2% until 2028 from ten individual bonds.

Get Started

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, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

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.