Debt capital is finally becoming more widely available to cannabis companies, according to one of the biggest bankers to the industry.
“You’re definitely going to see debt capital flow into the sector,” Dan Daviau, chief executive officer of Canaccord Genuity Group Inc., said in an interview at Bloomberg’s New York office last week. “That’s happening as we speak. You’ll see several debt deals announced over the next week or so.”
“You’re definitely going to see debt capital flow into the sector,” Dan Daviau, chief executive officer of Canaccord Genuity Group Inc., said in an interview at Bloomberg’s New York office last week. “That’s happening as we speak. You’ll see several debt deals announced over the next week or so.”
There are several implications here for the legal cannabis industry (and cannabis investors).
To begin with, this capital infusion is expected to take the form of true corporate debt. This is in contrast to the convertible debentures that became very popular within the cannabis industry previously – but have come back to haunt several cannabis companies.
With share prices currently in a deep trough, debenture holders have been converting these debt instruments to shares, with highly dilutive consequences. Straight debt deals will remove this as a potential balance sheet time-bomb for cannabis companies (and their shareholders).
According to Cannaccord’s Daviau, “four or five of the biggest guys” will see this debt being made available. In large part, this is because the transition to profitability of a number of these companies is “making them more attractive to lenders”.
This comes at a pivotal moment for the legal cannabis industry in North America. Cannabis 2.0 is now a reality in Canada. Phase 2 cannabis derivative products could begin shipping to retailers as early as December 17th.
In the U.S., the CDC came out last Friday with a statement that “the worst is over” for the vaping-related illnesses (and deaths) from cannabis/nicotine vaping products. While the illnesses have been attributed to tainted black market products, legal cannabis companies in the U.S. (and even Canada) have seen erosion in their share prices as a consequence of this U.S. regulatory failure.
Even before the CDC’s statement, there was a growing clamor that cannabis stocks were at or near a long-term bottom. With the industry as a whole at greater-than-two-year lows, rising revenues and emerging profitability were due to generate a reversal.
Adding additional upward pressure on marijuana stocks, Canadian cannabis heavyweight Canopy Growth (US:CGC / CAN:WEED) has rallied by more than 50% off its November low, following a buy recommendation from Bank of America Merrill Lynch.
At the very least, a significant (non-dilutive) capital infusion for some of the cannabis industry leaders could be a catalyst for a strong reversal for those companies. Given the extremely depressed share prices across the sector and over-exposure among short-sellers, it could be the trigger for a much broader industry rally.
Arguably, 2019 will go down as the year where everything that could go wrong for the legal cannabis industry did go wrong. On that basis, the calendar change to 2020 alone is a catalyst.
It’s hard to imagine industry headwinds in 2020 to parallel what was experienced in 2019. As tax-loss selling flushes out the rest of the weak hands, the legal cannabis industry is clearly poised for a better year in 2020.