Chart of the Week
The Viridian Capital Chart of the Week highlights key investment, valuation and M&A trends taken from that week’s Deal Tracker that we believe are impactful for investors, companies and acquirers.
Viridian Capital Chart of the Week: The Changing Composition of Cannabis Debt
- The Chart of the Week shows debt issuance since 2018 for U.S. Cultivation & Retail companies by type of debt.
- In the heady early days (pre-2021) of U.S. Licensed Operator financing, debt made up a significantly smaller portion of the capital structure, and debt with equity kickers accounted for a much higher percentage of total debt.
- In 2019, we began to see convertible issues with additional attached warrants to achieve total coverage exceeding 100%. High equity participation was required because the companies were mainly EBITDA negative and could not pay interest rates high enough to compensate lenders for taking essentially an equity risk. In 2019, straight debt with no equity components accounted for only 32.6% of the debt issued, and total debt made up 31.9% of the capital raised.
- As the U.S. MSOs became EBITDA positive in 2020 and 2021, issuance of straight coupon debt began in earnest, led by the $300M Curaleaf (CURA: CSE) deal in December 2020 and followed shortly after that by $100M and $120M deals by Cresco (CL: CSE) and TerrAscend (TER: CSE, respectively. Most of the top MSOs have now completed straight coupon issues, with many exceeding $100 million in size. Since 2021, the large majority of debt issuance has been straight debt with no equity kickers.
- Debt issuance has become virtually the sole source of financing, accounting for 92.9% of all sector financing, with over 90% of it comprising senior secured debt. Debt financing is largely available, however, only if you have solid collateral coverage, such as real estate. However, we do see a bit more reliance on corporate enterprise value and corporate cash flow in today’s market. Still, cash flow lending and mezzanine debt are strikingly absent. Perhaps this is a reaction to the industry’s current challenges, including the lack of legislative breakthroughs and the headwinds to growth and profitability. Alternatively, possibly mezzanine lenders perceive better risk-reward tradeoffs in more established industries. It strikes us that the extreme volatility in cannabis, due to the massive potential catalysts, would make equity-linked debt highly sought after. After all, equity linkages on secured debt provide both the safety of senior secured positions and potential equity-like returns. As available security becomes scarcer, we would expect to see a larger role for equity-linked debt.
- We Have seen an uptick in equity kickers in the 2025 YTD period, but the effect is almost entirely due to the Cannabist refinancing/restructuring in which debt holders were given approximately 24% of the company’s stock. Perhaps the pressures to refinance the remaining maturities in 2026 will produce the uptick that we believed would come from higher warrant values.
- Where is cannabis debt headed long-term? We believe the development of the U.S. high-yield market is instructive:
- Credit ratings are fundamental to the development of the market, as many funds have limits to the amount of unrated debt they can hold. An augmented Safer Act with cover for up-listing to major U.S. exchanges is probably a prerequisite for this.
- Standardization – Loan/bond structures, documents, and covenants will become more standardized, similar to what occurred in High Yield in the mid-1980s, thereby facilitating trading liquidity.
- Bifurcation – As in High Yield, larger Issues will migrate towards the public capital markets through public or 144A issuance. Issues less than $100 million will remain the province of private placements and financial institutions underwriting.
- Derivatives – Securitizations and CDS will follow credit ratings, providing both new funding mechanisms and greater ability to hedge credit risk.
- Transparency – public and private debt trades will be TRACE-eligible, providing market transparency on trading levels and spreads.
- The Cannabis debt market is only beginning its maturation, and massive opportunities exist for investors and operators alike.
