Even top multi-state operators (MSOs) are feeling the impact of the demand and supply capital imbalance faced by the cannabis industry, says Cantor Fitzgerald’s Pablo Zuanic who noted that refinancings are being undertaken at higher than normal costs.
“As we continue to ramp up our focus on the balance sheet structure of MSOs, we review three recent examples where debt was either equitized with the resulting dilution, or terms were extended at higher rates with also potential dilution,” Zuanic said in a recent analyst note.
What Are These MSOs?
In October 2022 Verano Holdings Corp. VRNO VRNOF refinanced $350 million debt due in April 2023 (8%) at a 12.75% variable rate (now 14%) due Oct 2026.
“The recent refinancing comes with a floating interest rate of prime + 6.5%, which at the time of the deal was equivalent to 12.75%, much higher than its previously agreed rate fixed at 8.5%,” said Zuanic. Moreover, the new structure allows for $270 million of additional debt financing and optional prepayment features.
Jushi Holdings Inc. JUSH JUSHF refinanced ~$75 million of debt at a 200bps higher cost and issued 17mn warrants. “Jushi had notes worth ~$75Mn due Jan’23 with a 10% coupon. (…) The company was able to delay paying ~$75Mn of debt principal for another four years. The cost of this increased flexibility was an additional 200bps plus 17mn warrants (on a share count base of ~197mn),” Zuanic said.
TerrAscend Corp. TRSSF converted C$125.5Mn in debt to 24.6mn exchangeable shares at C $5.10 per share (1.7x the closing price at the time), and 22.5mn common share purchase warrants to acquire common shares of TRSSF at C$6.07 per share.
In December, TerrAscend announced that it entered into an agreement with Canopy USA “to convert C$125.5mn in aggregate debt plus accrued interest into 24.6mn exchangeable shares of Canopy USA at a price of C$5.10, and 22.5mn 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 retired C$125.5Mn of debt.”
What Are The Most Levered MSOs?
Zuanic advised investors looking at the sector to “spend more time reviewing in detail” the companies’ balance sheets and cash flow. “We believe financial net debt metrics alone provide an incomplete picture, so we believe other factors should also be included in assessing B/S strength (tax debt, leases, contingent liabilities).”
Based on a revised definition of “broad net debt,” the most levered MSOs (of 15 reviewed) as of 9/30/22 were Jushi Holdings (4.4x), AYR Wellness Inc. AYR AYRWF (4.1x), TerrAscend (3.7x), and Ascend Wellness Holdings, Inc. AAWH AAWH (3.1x).
“We note that in 4Q22, through debt equitization and other means, TerrAscend significantly cut debt (to 1.3x EBITDA, as per our estimates). We assume similar-type actions may be expected too from companies with highly leveraged balance sheets,” Zuanic concluded.
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