Cannabis Lending

Friends, I’m confident you saw the news about Tilray signing a deal with Sandoz for global distribution of medical cannabis.  Indeed, the transformation of the industry continues to accelerate.

But instead, I’d like to call your attention to two smaller deals recently announced.

http://www.abladvisor.com/news/15390/chiron-completes-25mm-transaction-for-u-s-cannabis-producer  (thanks to Seth Freeman at GlassRatner for tipping me off to this news)

https://www.newcannabisventures.com/terrascend-lines-up-75-million-credit-facility-to-fund-u-s-cannabis-acquisitions/

Debt!  And not the convertible kind.  Working capital term, revolving, and equipment loans issued by non-bank lenders.  The kinds of loans that other businesses get all the time from banks.  There’s little info about the first one (the press release doesn’t even announce the name of the borrower – only the name of the shop that shopped the deal).  The TerrAscend is an interesting loan, in that it’s made by an affiliate (JW Asset Management, its largest investor), and the terms are not cheap (8.75% coupon, 1% fee), but generally in line with current high yield offerings.  And one of my friends has been arranging equipment loans for the industry for a while (he didn’t ask me to plug his business).

This is all good for the industry – traditional debt isn’t dilutive and thus produces leverage.  As companies get past the Series A and grow their asset base, they’ll want to find sources of capital that don’t erode the capital structure.  It does require that asset base, and although it’s hard for a lender at this point to put a lien on assets like licenses and flower, things like equipment, leasehold interests, contracts, and intangibles can all be solid collateral.  Leverage, when used wisely, can be a powerful tool – it’s what drives the private equity industry.

This is also good for investors – it’s another way to play in the industry while hedging the risk of pure equity investments.  Plus, at least for now, the borrower can’t file for bankruptcy (another feature of current Federal law). Throw in an equity kicker and that’s good eatin’.

Excelsior!

Written by: Marc Hauser