Pot Financing Loosens Up
(Bloomberg) -- Pot companies have long faced high prices to raise debt financing. But a pair of recent bond offerings show that terms are improving even as banks largely shun the industry.
Trulieve Cannabis Corp. recently raised $350 million by issuing a five-year secured bond callable after two years with an 8% coupon. While that’s still costly compared to terms for companies in other industries, it’s better than a 9.75%-coupon security of similar duration issued by the company in 2019, according to Bloomberg data. And AFC Gamma Inc., which itself provides financing to cannabis firms itself, said it decided to offer $100 million of senior unsecured notes due 2027 to expand its lending.
“Lending conditions have rarely or ever been this advantageous,” said Geof Marshall, senior vice president and head of high-yield bonds at CI Global Asset Management. That includes cannabis companies, even those “looking at the market for the first time.”
The improving conditions come despite obstacles for cannabis companies. Because the substance remains federally illegal, large banks don’t feel comfortable dealing with companies that are “plant-touching,” or dealing directly with marijuana. As a result, many cannabis operators turn to small, state-chartered banks or credit unions, or to Canadian lenders.
The SAFE Act, recently approved by the U.S. House of Representatives, would change that, letting banks deal with cannabis companies without fear of penalty -- but it has yet to get through the Senate. That may take a while considering the many competing interests, including Senate Majority Leader Chuck Schumer’s preference for broader legislation that will take more time, known as the Cannabis Administration and Opportunity Act.
In the meantime, some U.S. cannabis companies have looked to Canada-based firms for financing, in part because medical and recreational cannabis is fully legal in the country. Trulieve, a U.S. multistate operator, carried out its latest transaction via Canadian investment bank Cannacord Genuity.
The firms willing to provide financing are benefiting from outsized yields compared to other pockets of the debt markets.
The new debt raised by Trulieve, which has been reporting profits for years, is close to 2 percentage points more expensive than the yield investors demand to hold debt with significantly weaker balance sheets in other industries. By comparison, a Bloomberg index compiling junk bonds rated at Caa1 or Caa2, or seven and eight levels below investment grade, yield 6.18%.
Once taking into account the cost of arranging the debt transactions, a lot of multistate operators may have borrowing costs between 10% and 12%, said Len Tannenbaum, AFC Gamma’s chief executive officer. The second tier of operator face all-in borrowing costs at around 15% or 16%. Even less credit-worthy companies could have rates of 18% to 20%.
AFC Gamma, a specialist in lending to cannabis companies, was recently upgraded by analysts who see a strong lending pipeline ahead. The company has projected it will hit $300 million in new commitments in fiscal 2021.
The market for cannabis expansion “continues to be very robust,” said Tannenbaum. With more U.S. states legalizing, operators are expanding, which can require financing for construction and business operations. “So we think that there is even more money that’s needed.”
NUMBER OF THE WEEK
- $4 million: The minimum amount that two co-founders of CanaFarma Hemp Products Corp. allegedly misappropriated from investors, according to the U.S. Attorney’s Office in the Southern District of New York and the Securities and Exchange Commission.
QUOTE OF THE WEEK
“You have a lot of small LPs (licensed producers) that are these little ankle-biters. There’s no one LP grabbing a lot of market share out there. They’re just throwing dollars at the market just to stay alive. How long do they last? We’ll see. Tilray’s strategy is to build its brand. I look at the long term,” said Tilray CEO Irwin Simon, speaking in a phone interview just after the company’s first-quarter results, about the crowded Canadian cannabis market.
WHAT YOU NEED TO KNOW
- Justin Bieber is working with a Los Angeles-based company, Palms, on marijuana products, saying some people find cannabis helpful for their mental health.
- At its inaugural meeting, New York’s Cannabis Control Board said it would expand its medical marijuana program.
- Tilray’s shares fell after the company reported first-quarter adjusted earnings that missed analyst estimates.
- The Ontario government’s pot tourism idea has been complicated by restrictive rules at the municipal, provincial and federal level.
- Agrify Corp., a maker of equipment and software for cannabis cultivation, agreed to buy two companies that provide equipment for processing marijuana plants in a deal that could be worth as much as $65 million.
- Seattle’s city council voted unanimously to relax its rules against naturally occurring drugs, joining a handful of other cities that have decriminalized psilocybin and similar substances.
- The Parent Company said it has a deal to buy Coastal Holding Company LLC, a California dispensary and delivery operator.
- Canadian cannabis producer Sundial Growers Inc. will buy liquor and pot retailer Alcanna Inc., building on a vertical-integration strategy of acquiring stores.
- Credit Union Cannabiz Conference in Las Vegas runs through Oct. 15.
- The Valens Co. reports third-quarter earnings after the market closes.
- Benzinga Cannabis Capital Conference in New York runs through Oct. 15.
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