CANOPY’S $500M RAISE MEANS DEBT FINANCING MAY FINALLY BE ON THE HORIZON.
Deal set up as non-dilutive debenture
On Wednesday, Canopy
Growth Corp. closed a $500-million convertible debenture offering, of which $200 million was taken by Fortune 500 alcohol seller Constellation Brands Inc.
The financing, notable for its size and the involvement of Constellation — already a 14-per-cent shareholder of Canopy, through subsidiary Greenstar Canada Investment Limited Partnership — also appears to mark a turning point in how large cannabis companies are able to raise capital.
Co-led by BMO Nesbitt Burns Inc. and U.S. investment bank Cowen and Company LLC, the deal was internationally focused, with only around 10 per cent of the debentures going to Canadian institutions, according to Canopy chief executive Bruce Linton.
European investment bank Bryan, Garnier & Co. also helped underwrite the deal, the first time an investment bank outside of North America has directly participated in Canadian cannabis financing.
Of equal importance, the convertible debentures were structured more along the lines of traditional debt than we’ve seen so far in the industry. The debentures carry a 4.25-per-cent coupon, closer to interest rates you’d find on mainstream corporate bonds, and a much higher conversion premium.
“You’ve got a 25-per-cent premium on the share price before it becomes in the money to convert the note into equity, so it does mean that you’ve got some room in the stock for it to move while it’s still treated like debt,” said Jonathan Sherman, co-chair of law firm Cassels Brock & Blackwell LLP’s cannabis group, who worked on the deal.
“After three years we have the right to buy them out and not let them convert, so it means that we can really start to have a capital structure that’s starting to look like a company that’s substantial,” added Linton.
To date, most Canadian cannabis companies, including Canopy, have raised money through a combination of equity issues and convertible debentures with low conversion premiums and “sweeteners,” like share purchase warrants, attached to them. This has allowed companies to raise early-stage capital, but has also led to significant shareholder dilution.
The only pure debt financing so far was a $56-million deal between Alberta grower Sundial Growers Inc. and provincial Crown corporation ATB Financial.
For the industry to mature, more companies need to be able to issue non-dilutive debt, said Chuck Rich, a partner at Cassels Brock, who specializes in corporate lending. That, however, could prove a challenge in the short term, given the difficulty of securing collateral from cannabis companies.
“One could argue that the licence itself is one of the most valuable assets that one of these companies would have, but those licences are not transferable,” said Rich, who also worked on the Canopy deal.
THE REAL TRIGGER HERE IS GOING TO BE RECEIVABLES.
“Then you have the inventory, which most businesses would want to put up as collateral, but banks are not going to have any interest in taking cannabis itself as collateral.”
Likewise, many cannabis companies have considerable real estate assets. But as Sherman puts it: “There are not that many lenders in the space that want to buy a massive greenhouse out in the country that has way more security than anyone would ever need to grow tomatoes.”
“The real trigger here is going to be receivables and as soon as we start seeing some cash flow and some receivables from the recreational market then I think you’ll start to see some debt deals,” Sherman said.
That means banks could begin to do debt deals with cannabis companies in the first or second quarter after recreational cannabis sales start on Oct. 17.
If Canopy’s deal this week is anything to go by, some banks, most likely BMO, may begin dipping their toe before then into something that looks more like debt.