In A Positive Sign For The Industry, Cannabis Companies Are Winning Lower Priced Debt Deals

Cannabis companies are posting robust sales growth and, in doing so, winning better debt deals. 

Legal U.S. cannabis sales surpassed $17.5 billion in 2020, a 46% spike from 2019, according to Canaccord Genuity. Analysts at Cowen estimate annual legal sales will reach $41 billion by 2025.

In California, the nation’s largest market, 45% of residents said this year they buy cannabis, up from 33% in 2020, according to cannabis analytics firm BDSA. Similar upward trends developed in other states with legal recreational cannabis, pointing to ongoing momentum. 

The sales strength makes cannabis companies more attractive to lenders.

Green Thumb Industries GTBIF, for one, recently reported 90% comparable sales growth in the first quarter and said it also secured sub-10% coupon on a debt deal -- a first for a large public U.S. cultivator. The company got a three-year loan at a 9.1% rate after accounting for warrants, according to Viridian Capital Advisors. 

To be sure, that is still pricy by most industry standards, but just two years ago, prior to the pandemic, cannabis companies typically paid rates closer to 15%.  

Terms are also improved -- including longer maturities and the ability to pay off debt before maturity. Curaleaf, for one, recently secured a credit facility at 10.25% with the ability to prepay. 

On their latest earnings calls, executives at both Curaleaf CURLF and GTI said debt is becoming more attractive.

This suggests more high-net-worth family offices and institutional investors will be interested in providing debt capital -- and borrowing costs could decline further. As the industry matures and financials steadily improve, lenders see more security in loans to cannabis companies. 

Even as traditional banks are wary because cannabis is not yet legal at the federal level, the fact that cost of capital in alternative markets is coming down reflects mounting belief in the long-term growth prospects for the industry. 

In addition to sales momentum, the reputational stigma tied to cannabis is quickly fading as more states legalize cannabis and federal legalization grows increasingly likely. After Democrats took control of the Senate this year,  the shift put the U.S. now on a path to full federal legalization.

This followed November ballots in Arizona, Montana, South Dakota and New Jersey that all approved the legalization of adult use. New York and several other states have since followed suit. States and the federal government are hungry for new sources of tax revenue, providing added incentive to increase the size of the legal sector. 

All of this provides added reason for lawmakers to pass the SAFE Banking Act – a proposal in Washington that would ensure that banks could take on cannabis business clients without facing federal penalties. 

Passage of SAFE would lead to more credit options for cannabis companies, in additional to secure day-to-day banking services. It would also mark another important step toward federal legalization.

The pace and timing of full reform is difficult to project, but the trend toward legalization is clearly under way, and debt markets’ embrace of the cannabis industry provides important affirmation.

Lower borrowing costs could translate into a lower cost of capital for cannabis companies, resulting in less equity dilution and better positioning companies for even stronger growth ahead of more new markets opening.  It could also better position them for public offerings. 

Even brighter days lies ahead. 

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