Even the top multi-state operators (MSOs) are feeling the effects of the demand-and-supply capital imbalance faced by the cannabis industry, says Pablo Juanic of Cantor Fitzgerald, who noted that refinancing is at a higher than usual cost. being done.
Zuanic recently said, “As we continue our focus on the balance sheet structure of MSOs, we review three recent examples where debt was either equated with consequential dilution, or the terms was increased at higher rates.” Analyst Note.
What are these MSOs?
in October 2022 Verano Holdings Corporation VRNO VRNOF Refinanced the $350 million loan due in April 2023 (8%) at a 12.75% variable rate (now 14%) due October 2026.
“The recent refinance comes with a floating interest rate of prime + 6.5%, which stood at 12.75% at the time of the deal, significantly higher than the 8.5% fixed rate earlier,” said Juanic. In addition, the new structure allows for up to $270 million in additional debt financing and optional prepayment facilities.
Zushi Holdings ink Jash JUSHF Refinanced ~$75 million of debt at 200 bps higher cost and issued 17 million warrants. “Jushi had notes worth ~$75Mn with 10% coupons on January 23. (…) The company was able to delay paying the ~$75Mn loan principal for the next four years. This increased flexibility The cost was an additional 200 bps plus 17 mn warrants (on a share count base of ~197 mn),” Zuanic said.
TerrAscend Corp TRSSF C$125.5Mn loan converted into 24.6mn convertible shares at C$5.10 per share (1.7x at the time closing price), and 22.5mn ordinary share purchase to acquire TRSSF ordinary shares at C$6.07 per share Warrant.
In December, TerrAscend announced that it had entered into an agreement with Canopy USA “To convert C$125.5mn in total debt and accrued interest into convertible shares of 24.6mn Canopy United States at a price of C$5.10, and 22.5 million new common share purchase warrants to acquire common shares of TRSSF at a weighted-average exercise price of C$6.07,” Zuanic said. The transaction is a significant deleveraging event for TerrAscend, as it retires C$125.5Mn of debt.”
Which are the most respected MSOs?
Zuanic advised investors to “spend more time reviewing in detail” the balance sheets and cash flows of companies. “We believe that financial net debt metrics alone provide an incomplete picture, so we believe that other factors should also be included in assessing B/S strength (tax debt, leases, contingent liabilities).”
Based on the revised definition of “broad net debt,” the most benefitting MSOs (15 reviewed) as of 9/30/22 were Zushi Holdings (4.4x), AYR Wellness Inc. eyre AYRWF (4.1x), TerraAscend (3.7x), and Ascend Wellness Holdings, Inc. Ahh Ahh (3.1x).
“We note that in 4Q22, TerrAscend cut debt significantly (1.3x EBITDA per our estimates), through debt equity capitalization and other means. We believe that similar actions can be expected from companies with highly leveraged balance sheets,” Zuanic concluded.
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