Debt has taken a leading role in financing the cultivation and retail sectors, accounting for nearly 77% of global capital raised year-to-date, significantly more than at any comparable period in history. The prevalence of debt is even higher in the US, accounting for over 94% of funds raised.
The rise in debt has a lot to do with the collapse in share prices over the past year and a half, but also with the realization that the sector has become more creditworthy. In 2018-2020, most companies were funded with convertible bonds, often with significant additional option coverage.
Several cannabis debt financing trends are reversing:
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The blue line on the graph (measured along the left axis) shows the percentage of debt transactions that involved equity. As recently as early 2021, over 50% of all debt securities were either convertible or warranted. This number has fallen sharply, so that in Q1:22 only about 9% of deals were equity-linked. This trend reversed sharply in Q2 and Q3, rising back above 50%.
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Effective cost of debt is a metric that reflects the value of embedded options in equity-linked structures. It is shown in the red line of the chart and measured on the right axis.
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The effective cost of borrowing declined for most of 2021 but rose sharply in Q3 22. While the larger MSOs with better credit quality achieved effective costs of around 8% in early to mid-2021, they are conspicuously absent from the market today. Companies in the market have been under liquidity pressure and have paid a heavy price for it. Lowell Farms CSEfor example, raise $6.7 million at an effective cost of over 30%.
We expect this trend to continue into year-end as cash-constrained companies face either dilutive equity offerings or highly impacting borrowing costs to complete. Companies with sufficient liquidity reserves are waiting for the promise of more attractive financing under the SAFE+ Act.
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends from the Viridian Cannabis Deal Tracker.
The Viridian Cannabis Deal Tracker provides the market intelligence cannabis companies, investors and acquirers use to make informed capital allocation and M&A strategy decisions. The Deal Tracker is a proprietary intelligence service that monitors fundraising and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week, the tracker aggregates and analyzes all closed deals and segments by key metrics:
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Deals by Sector (To track cash flow and M&A deals by one of 12 sectors – from cultivation to brands to software)
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Transaction structure (equity/debt for capital increases, cash/stock/earnout for M&A) Status of the company announcing the transaction (public vs. private)
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Transaction principals (issuer/investor/lender/acquirer) Key terms and conditions (pricing and valuation)
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Key Business Terms (Business Size, Valuation, Pricing, Warrants, Cost of Capital)
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Deals by issuer/buyer/seller location (to track cash flow and M&A deals by state and country)
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Credit ratings (debt and liquidity ratios)
Since its launch in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 fundraising and 1,000 M&A transactions totaling over $50 billion.
The previous article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.
