Cannabis Chart Of The Week: The Importance Of Liquidity Management In Credit Quality

The graph depicts the two most significant factors in the Viridian Credit Tracker credit scoring model, Liquidity (blue) and Leverage (red) for the group of 12 U.S. Cultivation & Retail companies with Market caps between $10M and $75M.

The Viridian model uses eleven financial and market-based ratios to measure these two factors and Profitability and Size to determine a credit score and credit ranking (green). 

The companies on the left side of the graph, including Vext VEXTF and C21 CXXIF, exhibit strong liquidity and low leverage and earn top credit ranks.

Companies on the right side of the graph, including MedMen MMNFF, StateHouse STHZF, and Unrivaled Brands UNRV, have both high leverage and low liquidity resulting in the worst credit rankings on the graph. 

Credit quality is not static; aggressive liquidity management can sometimes successfully raise credit quality significantly, while in other cases, these restructuring moves fall short:

• Tilt Holdings had $76.5M of current maturities on its September balance sheet, causing a significant liquidity issue. Its free cash flow adjusted current ratio of .83 clearly shows the problem. Tilt substantially eliminated the liquidity squeeze by undertaking a $15M sale-leaseback, $38M of Amended and Restated notes due 2026, and $8.2M of PIK Secured Promissory Notes due 2027. Additionally, the company used cash from operations to retire approximately $10M of debt in Q4: 2022 and Q1: 2023. The net result is a dramatic improvement in liquidity ranking from #7 to #5 and overall credit ranking to #3.  

• In our view, Red White & Bloom’s restructuring program was less successful in curing its credit stresses. RWB’s June balance sheet virtually screamed “liquidity crises,” with FCF adjusted current ratio of .09. Like Tilt, RWB substantially restructured its liability structure, doing approximately $10.5M of debt for equity swaps and refinancing roughly $70M of maturities to 2024. Unfortunately, these moves were insufficient to solve its liquidity issues, and the company continues to rank the lowest of the group on this measure.

Pursuing active liability management to its best effect requires closely examining a company’s key credit weaknesses and focusing on that problem.

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.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.