Cannabis financing starts to loosen up
Pot companies have long faced high prices to raise debt financing. But a pair of recent bond offerings show that terms are improving even as banks largely shun the industry.
Trulieve Cannabis Corp. recently raised US$350 million by issuing a five-year secured bond callable after two years with an 8 per cent coupon. While that’s still costly compared to terms for companies in other industries, it’s better than a 9.75 per cent-coupon security of similar duration issued by the company in 2019, according to Bloomberg data. And AFC Gamma Inc., which itself provides financing to cannabis firms, said it decided to offer US$100 million of senior unsecured notes due 2027 to expand its lending. “Lending conditions have rarely or ever been this advantageous,” said Geof Marshall, senior vice-president and head of high-yield bonds at CI Global Asset Management. That includes cannabis companies, even those “looking at the market for the first time.”
The improving conditions come despite obstacles for cannabis companies. Because the substance remains federally illegal in the U.S., large banks don’t feel comfortable dealing with companies that are “plant-touching,” or dealing directly with marijuana. As a result, many cannabis operators turn to small, state-chartered banks or credit unions, or to Canadian lenders.
The SAFE Act, recently approved by the U.S. House of Representatives, would change that, letting banks deal with cannabis companies without fear of penalty — but it has yet to get through the Senate. That may take a while considering the many competing interests, including Senate Majority Leader Chuck Schumer’s preference for broader legislation that will take more time, known as the Cannabis Administration and Opportunity Act.
In the meantime, some U.S. cannabis companies have looked to Canada-based firms for financing, in part because medical and recreational cannabis is fully legal in the country. Trulieve, a U.S. multistate operator, carried out its latest transaction via Canadian investment bank Cannacord Genuity.
The firms willing to provide financing are benefiting from outsized yields compared to other pockets of the debt markets.
Once taking into account the cost of arranging the debt transactions, a lot of multistate operators may have borrowing costs between 10 per cent and 12 per cent, said Len Tannenbaum, AFC Gamma’s chief executive.
The second tier of operator faces all-in borrowing costs at around 15 per cent or 16 per cent. Even less creditworthy companies could have rates of 18 per cent to 20 per cent.
AFC Gamma, a specialist in lending to cannabis companies, was recently upgraded by analysts who see a strong lending pipeline ahead. The company has projected it will hit US$300 million in new commitments in fiscal 2021.