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 recently raised $350 million by issuing a five-year secured bond callable after two years with an 8% coupon. While that's still costly compared with terms for companies in other industries, it's better than a 9.75%-coupon security of similar duration issued by the company in 2019, according to Bloomberg data. And AFC Gamma, which provides financing to cannabis firms, said it decided to offer $100 million of senior unsecured notes due in 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 illegal under federal law, 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, 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 both medical and recreational cannabis are 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 with other pockets of the debt markets.
The new debt raised by Trulieve, which has been reporting profits for years, is close to 2 percentage points more expensive than the yield that investors demand to hold debt with significantly weaker balance sheets in other industries. By comparison, a Bloomberg index compiling junk bonds rated Caa1 or Caa2, or seven and eight levels below investment grade, yield 6.18%.
Taking into account the cost of arranging the debt transactions, a lot of multistate operators may have borrowing costs between 10% and 12%, said Len Tannenbaum, AFC Gamma's chief executive officer. The second tier of operators face all-in borrowing costs around 15% or 16%. Even less-creditworthy companies could have rates of 18% to 20%.
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 $300 million in new commitments in fiscal 2021.
The market for cannabis expansion "continues to be very robust," said Tannenbaum. With more U.S. states legalizing, operators are expanding, which can require financing for construction and business operations. "So we think that there is even more money that's needed."