The Cost Of Debt For U.S. Cultivation & Retail Companies Is Increasing

Debt has represented approximately 94% of all capital raised by U.S. Cultivation & Retail in 2022, significantly greater than in any previous year in cannabis history.

Equity issuance for cultivators has come to a virtual halt, with less than $80M of equity raised in 2022 compared to approximately $2.0B in 2021. Companies are reluctant to issue equity at multi-year lows, and the end-of-year crash has shell-shocked investors.

The graph shows U.S. Cultivation & Retail sector debt financing and average effective costs considering the impact of conversion features and warrants.

Banks and other institutional investors are continuing to tiptoe into cannabis and occasionally offering eye-popping rates for top-tier companies. A good example is the twin transactions closed by Trulieve TCNNF this week at below 8% rates. 

Credit has also been available at reasonable rates for smaller companies with excellent credit quality and attractive collateral. Vext Science VEXTF and Body and Mind BMMJ closed deals with effective costs in the 11.25% range.

Companies with high leverage or perceived liquidity are receiving less hospitable treatment. Jushi JUSHF recently priced a deal with 50% warrant coverage and an effective cost of around 15.25%.

On average, rates have risen sharply. After dropping over 500bp between 2020 and the second half of 2021, rates are up nearly 300bp. 

We expect average effective rates to continue rising and the debt markets to become increasingly credit-conscious as a likely recession draws nearer.

The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from the Viridian Cannabis Deal Tracker.

The Viridian Cannabis Deal Tracker provides the market intelligence that cannabis companies, investors, and acquirers utilize to make informed decisions regarding capital allocation and M&A strategy. The Deal Tracker is a proprietary information service that monitors capital raise and M&A activity in the legal cannabis, CBD, and psychedelics industries. Each week the Tracker aggregates and analyzes all closed deals and segments each according to key metrics:

• Deals by Industry Sector (To track the flow of capital and M&A Deals by one of 12 Sectors - from Cultivation to Brands to Software)

• Deal Structure (Equity/Debt for Capital Raises, Cash/Stock/Earnout for M&A) Status of the company announcing the transaction (Public vs. Private)

• Principals to the Transaction (Issuer/Investor/Lender/Acquirer) Key deal terms (Pricing and Valuation)

• Key Deal Terms (Deal Size, Valuation, Pricing, Warrants, Cost of Capital)

• Deals by Location of Issuer/Buyer/Seller (To Track the Flow of Capital and M&A Deals by State and Country)

• Credit Ratings (Leverage and Liquidity Ratios)

Since its inception in 2015, the Viridian Cannabis Deal Tracker has tracked and analyzed more than 2,500 capital raises and 1,000 M&A transactions totaling over $50 billion in aggregate value.