Adam Jackson
Canopy Growth Corp. (Nasdaq: CGC) suffered another financial blow this week, with its long-term issuer default rating (IDR) downgraded by Fitch Ratings from CCC- to RD due to recent debt swaps and operational concerns, the firm wrote in a memo Thursday.
Fitch indicated that the downgrade reflects the agreements between Canopy Growth, 11065220 Canada Inc., and some convertible noteholders, which agreed to exchange their debt for common shares. Following the completion of the exchange, Fitch reassessed the IDR, upgrading it back to CCC-.
“The post-exchange IDR of ‘CCC-‘ reflects Canopy’s current liquidity position including actions taken to reduce the high cash burn rates and recent asset sales and the uncertain path to profitability due to executional risks around its operating strategies,” Fitch said.
The ratings firm warned of more negative rating actions if Canopy continues its “distressed debt exchange” streak or if its liquidity situation worsens.
Canopy recently negotiated exchange agreements with some noteholders, cancelling C$12.5 million of the convertible notes due July 15 for a cash payment of unpaid and accrued interest and the issuance of approximately 24.3 million Canopy common shares. Fitch views the transaction as a Distressed Debt Exchange under its criteria.
Canopy’s liquidity situation has also been a concern. As of March 31, Canopy’s cash and short-term investments were C$783 million. Adjusting for payments made after the year-end close, the company has around $666 million, according to management’s earnings call. The cash position would seem decent if the company didn’t lose $3 billion in the same breathe.
Fitch noted that Canopy continues to face operational challenges, particularly in the Canadian cannabis market. In response, the company has recently announced restructuring plans to move towards an asset-light, third-party sourcing model, including the closure of the Smiths Falls cultivation facility and heavy workforce reductions.
Canopy USA Risks
Meanwhile, Canopy’s attempt to expand into the U.S. market, through the creation of a new U.S.-domiciled holding company, Canopy USA LLC, also carries “material execution risks,” according to the ratings firm.
Fitch noted that Canopy had to file a revised proxy statement as the previous CUSA structure was not in compliance with Nasdaq’s listing rules.
“Presently, little clarity exists around Canopy’s timeline to move forward with this organizational structure, including the successful completion of the proxy review and timing for the shareholder vote,” the report noted.
Fitch outlined viable rating bumps if Canopy could execute strategic initiatives that result in “greater clarity around a pathway to profitability” over the next 24-36 months.
Still, potential risks that could lead to further downgrades include a further reduction in liquidity, lack of profitability improvement, and potential debt restructuring that aligns with Fitch’s definition of a DDE.
