Sundial Could Be Affected By Parallel’s Debt Defaults

The debt troubles facing Parallel are exposing the risk to other companies. Innovative Industrial Properties (NYSE: IIPR) gets 10% of its revenues from Parallel and Sundial’s (OTC: SNDL) joint venture with SAF Group called Sunstream Bancorp owns some defaulted debt. 

In March 2021, Sundial Growers Inc. formed a  50/50 joint venture with SAF Opportunities LP, a member of the SAF Group called SunStream Bancorp Inc. The Joint Venture’s first mandate was the formation of a special opportunities fund with commitments from third-party limited partners alongside an initial commitment from Sundial of $100 million. 

Sunstream is the owner of $145 million of Junior notes owned by Parallel Cannabis and those notes are in default – exposing Sundial to the loss. According to the lawsuit filed by disgruntled investors, the notes were purchased shortly after the joint venture was formed and was likely the venture’s first investment or one of the first investments. The notes were purchased on May 7, 2021. The lawsuit actually attributes the purchase to SAF Group, but Sunstream’s spokesperson did confirm that it was Sunstream that owned the debt, not SAF Group. 

Parallel used the Junior Note to refinance seller financing provided by the sellers of New England Treatment Access (“NETA”). NETA is a cannabis facility that Parallel acquired in 2019. The Junior Note carries an annual non-default interest rate of 14.25%. Sunstream may have felt some comfort in the language of the Junior Note that stated Parallel couldn’t incur any more debt, but the company is alleged to have done just that. 

According to the court filing, “On December 16, 2021, Parallel received an even more alarming default notice—this time for the Junior Note—in the form of a Notice of Default, Election of Default Rate and Reservation of Rights to the Company (the “Junior Lien Notice”) from Talladega LP, the Administrative Agent and Collateral Agent for the Junior Note holders. The Junior Lien Notice informed the Company that it had failed to (i) maintain the required debt-service-coverage ratio; (ii) maintain specified adjusted consolidated EBITDA as of September 30, 2021; and (iii) “pay Catch-Up [a]mount[s]” due as of September 30, 2021.”

Sunstream’s Silence On Parallel

Sunstream has made a big deal out of most of its investments. It has lent money to Jushi (OTC: JUSHF) and the SPAC Greenrose Acquisition Corp. Michigan-based Skymint also got financing from the joint venture. However, one would be hard-pressed to find any mention of the $145 million investment in Parallel. Despite the numerous press releases crowing about these deals and more, there is little information about the purchase of the notes from Sunstream or Sundial. 

Sunstream has also let it be known it was planning to go public. Sunstream IVXX Investment Corp. announced that it has submitted a draft registration statement on a confidential basis to the U.S. Securities and Exchange Commission for a proposed initial public offering of its common stock. Could a dud investment affect that IPO?

Sundial’s investors

In July 2021, Sundial increased its commitment to SunStream Bancorp Inc. to $538 million from its previously announced commitment of $188 million. In October 2021, Sundial reported it was buying the common shares of Alcanna Inc., and after extending the closing date, completed the transaction at the end of March. The valuation fell from an all-stock deal valued at $346 million to and combination of cash and stock valued at $320 million. So, it seems as if it’s business as usual at Sundial. However, analysts covering Sundial will no doubt want to know if the effects of this default will bleed into Sundial’s books.