Rightfully or wrongfully (and almost certainly wrongfully), North American financial institutions have suddenly become skittish about capital funding for legal cannabis – even in Canada’s fully legal industry.
In Canada, Phase 2 of cannabis legalization is literally days away. This will legalize a much wider variety of cannabis products (generally higher margin products). It is also projected to increase the consumer base by roughly 50%.
Question: what rational financial institution would not be lining up to fund such growth? Of course, as we are seeing with the rabidly negative coverage of the cannabis industry by the mainstream media, “cannabis” and “rationality” are two words that rarely cross paths these days.
The response of the cannabis industry to this sudden change in attitude from the banking sector? Surprise, for sure. But are we also seeing panic?
It’s hard to raise capital at the moment in the legal cannabis industry. Is this a temporary situation, or a long-term problem?
Almost certainly, it is a temporary situation.
- The regulatory failure in the United States that has led to 100’s of vaping illnesses (and 20+ deaths) is already starting to abate due to greater awareness on the part of both consumers and manufacturers/distributors. Eventually, U.S. politicians and regulators will get their act together and provide the necessary legal and regulatory changes to fix this issue.
- This problem has nothing to do with the Canadian cannabis industry. These products aren’t even legal yet, so no legal cannabis company has been affected at all. Even on the black market, we’re not seeing the same reckless shortcuts in Canada that have led to the U.S. illnesses.
- Canada (in particular) is now seeing strong, steady revenue growth for the legal cannabis industry.
- International markets are steadily emerging for the cannabis industry – including capital markets.
- The SAFE cannabis banking bill is currently before the U.S. Senate.
Let’s take these points in order.
The mainstream media has been reprehensible in its exaggerations and fearmongering connected with U.S. vaping illnesses. Few national media outlets have even identified this as a regulatory failure – a tobacco industry failure.
Instead, these shameless media opportunists have attempted to depict less than two dozen deaths as some sort of national cannabis “crisis”, or even an “epidemic” – including the New York Times. And many of these deaths/illnesses are connected to tobacco vaping.
Tobacco itself kills 1,300 people per day in the United States. That’s a real crisis and epidemic.
Even if this were a real crisis, it’s a temporary U.S. problem – not a problem for Canada’s cannabis industry. There is no reason for valuations of Canadian cannabis companies to have been impacted by this media hype.
Quite the opposite. Canada’s cannabis industry is now seeing strong, consistent revenue growth each month as the provinces have finally reached a critical mass in opening new cannabis retail stores.
Now Phase 2 is here. More products. Higher margins. More consumers. North of the Border, it’s full-steam ahead for the legal cannabis industry.
Last, but not least, North America isn’t the only source of capital funding for the cannabis industry. If North American bankers can’t extract their heads out of their posteriors, there are other banks in the world.
Cannabis is still federally illegal in the U.S. Where has the U.S.’s legal cannabis industry previously gotten most of its capital funding? Canada.
Ironically, just as raising capital is causing panic among cannabis companies, the SAFE banking bill is now being considered by the U.S. Senate. Recent news that Senate Majority Leader Mitch McConnell just had a private lunch with the cannabis industry is fueling speculation that he's ready to support legalized banking for U.S. cannabis.
If Canadian banks are no longer interested in doing business with the legal cannabis industry (and if SAFE doesn't pass), it won’t take long for other financial institutions to seize the opportunity and fill the void.
While Cannabis Phobia has suddenly (and irrationally) taken hold in North America, Cannabis Fever is coming to other parts of the world.
Australia and South America are both seeing rising growth, rising interest, and rising respectability for the legal cannabis industry. Mexico seems to be on a trajectory for full legalization in the near term.
It’s somewhat more cumbersome for foreign banks to do the necessary due diligence on North American cannabis companies. However, for Australian or South American (or Mexican) banks that are financing emerging cannabis industries, why wouldn’t they want to take a closer look at more mature cannabis markets – and do some business at the same time?
In the meantime, why are we seeing panic among cannabis companies on the financial front? Again, we can point to the Corporate Media.
For cannabis companies (and their management), it’s the proverbial “damned if I do, damned if I don’t” dilemma. If a cannabis company pulls back from a financing because it can’t get good terms at present, a flock of media Chicken Littles immediately begin shrieking “the sky is falling”.
If a company bites the bullet and obtains financing on less-than-optimal terms, the mainstream media is there with its spotlights and megaphones – along with the short-sellers.
Village Farms (US:VFF / CAN:VF) is a strong, large-scale Canadian cannabis cultivator with oodles of agricultural expertise and a substantial agricultural business outside of the cannabis industry.
Even this company can’t currently finance on good terms. It recently closed a bought-deal financing (at a dollar below its current share price) and within hours of announcing that deal its stock had been sold down to that level.
What choice did Village Farms have? Do nothing.
This isn’t a company that is starved for operating capital. Failing to do a financing isn’t the end of the world.
Yes, the stock would take a hit on the announcement. But it got the “hit” anyway – and dilutive financing for the company and shareholders.
At the same time that most North American financial institutions are skittish about cannabis, several (former) investment bankers with JPMorgan (US:JPM) and Deutsche Bank (US:DBK) are currently raising $2 billion to finance loans and equity investments in the legal cannabis industry.
Why? Opportunity.
If some bankers want to walk away from (profitable) business, other bankers will replace them.
Legal cannabis is not some mirage. We see this very clearly in Colorado, with the world’s most mature legal cannabis market. The news there? New cannabis sales records in four out of the last 5 months – six years into full legalization.
This isn’t some flash-in-the-pan (i.e. cryptocurrencies). Legal cannabis is the Real Deal.
Smaller cannabis companies may not have the luxury of simply waiting for better financial conditions. Most have much higher capital needs relative to revenues.
However, for the larger companies that already have substantial revenue streams (and ample cash on hand), there is the option to wait. Dial back operations slightly. Maybe even (shudder!) engage in some internal layoffs.
The Green Organic Dutchman (CAN:TGOD / US:TGODF) was recently punished by the market for not being able to complete a financing (on reasonable terms). But the company has no debt and CAD$56.7 million in available cash. There is no danger that the lights will get turned off.
Other capital-intensive industries (notably mining) have had to deal with difficult financial conditions for many years. The companies adapt…or perish.
Raising capital may never again be as easy as it was for the legal cannabis industry 2 – 3 years ago. But it will get better than it is today.
Bankers smell opportunity. Legal cannabis is an enormous opportunity. There is no reason for any of the larger cannabis companies to be panicking.