Debra Borchardt
It’s well known that many cannabis companies are saddled with more debt than they can handle. Green Market Report recently wrote about MedMen’s admission that it didn’t have enough money to pay what bills it had. The once self-proclaimed “first unicorn” of cannabis also defaulted on some of its debt.
Other companies also have defaulted on their debts, including:
- Parallel Cannabis quit paying its lenders in a story that came to light when one lender sued the company for taking on more debt that its loan agreement allowed.
- High Times Holding Corp. defaulted on its loans from ExWorks Capital.
- IAnthus and Manifest 7 both announced they had defaulted on their debts in 2021.
Innovative Industrial Properties told investors that some of its clients can’t pay the rent on the real estate properties that sold to the REIT, and in turn, the company is having a hard time finding new tenants to take over. One of those companies was Parallel Cannabis.
Not being able to pay your debt is the first sign of a distressed company – and that pressure tends to trickle down to other things like rent and vendor payments.
Viridian Capital Advisors took a closer look at the value of two companies’ distressed debt: AYR Wellness (CSE: AYR.A) and Canopy Growth Corp. (Nasdaq: CGC). Both have debt that is trading at stressed levels, meaning the price is worth less than the face value of the debt.
In the case of premium-priced debt, investors are willing to pay more than the face amount because of the likelihood that a stable company will pay that debt on time. Examples like FedEx or AT&T command premium prices for their corporate bonds.
Ayr Wellness vs. Canopy Growth
So how do the two companies compare on debt?
- Ayr’s 12.5% notes, due Dec. 10, 2024, have traded as low as 56.5% of par to yield around 65%.
- Canopy’s Supreme Cannabis 8% notes, due Sept. 15, 2025, traded as low as 61% of par to yield close to 30% in December 2022. The company’s senior secured term loan was recently quoted at 81%.
Ayr Wellness
Viridian was quick to note that the debt Ayr carries that comes due this year is pretty manageable. Next year, however, could be a problem, with $110 million of 12.5% notes due in December 2024.
That’s still 18 months away, so the company has plenty of time to address it with some refinancing or friendlier capital markets. Viridian, though, stated that with Ayr’s market cap at $91 million, that debt looks fairly intimidating.
The company is already addressing underperforming assets with its recent decision to sell its Arizona assets which is reducing the company’s long term debt by $22 million. It’s also getting $15 million in long-term lease obligations off its back. Shareholders may ultimately rewards the company if it sees management is getting the situation under control and send the market cap higher.
Canopy Growth
Canopy’s situation is more pressing than Ayr’s. Viridian noted that the company has approximately $249 million of unsecured notes that mature on July 15, 2023.
“The company currently has about $592M of cash, a negative free cash flow of around $50M per quarter, and a $100M minimum liquidity covenant in its senior debt. At its current run rate, this spells potential trouble by year-end 2023,” Viridian’s Frank Colombo wrote.
But before the trumpets can start playing “Taps,” it’s worth mentioning that this debt represents only about 20% of the company’s enterprise value. Viridian said that provides flexibility to do debt/equity swaps and other financial engineering to produce liquidity, at least for the next 12 months.
Forget Bankruptcy
In other industries, companies can file for restructuring like Chapter 11, where it can continue to operate while figuring out a way to settle the debt. Unfortunately for cannabis, the bankruptcy courts aren’t an option in the U.S.
While Canada offers the Companies’ Creditors Arrangement Act (CCCA), which several cannabis companies have used, U.S. companies can only go under or hope to find a buyer for its distressed assets.
While some properties, such as Medmen’s New York assets, have yet to find a buyer, there’s always a price someone is willing to pay. One man’s trash is another man’s treasure.
