VIRIDIAN INSIGHTS

• More indications of stress/distress appear in the market.

• On February 7, 2023, $1M AYR 12.50% bonds due 12/10/2024 traded on the CSE at 55,  down from a previous $10M trade at 70 on January 25. It is shocking to see such heavy discounts for notes with such short maturities and high coupons issued by one of the country’s largest MSOs. The seller of these bonds is obviously none too confident of the company’s ability to refinance the debt between now and the slightly less than 2-year maturity. We are more optimistic about the company’s ability to satisfy this maturity. Still, we have noted previously that the $110M outstanding amount of this debt is quite large relative to the company’s current under $100M market cap. It demonstrates a fact about liquidity- it’s all about confidence and perception. Corporate bonds are rarely paid off from operating cash flows; they are almost always refinanced before maturity. If the market perceives that you are likely to be able to roll your debt, then a two-year maturity bond should begin to trade asymptotically closer to par. However, if there are doubts about your ability to refinance, then the same bond can begin to trade to a perceived recovery value, and yield calculations go out the window. Given last week’s MariMed deal at an effective cost of 19.7%, a two-year AYR 12.5% bond would likely trade at some discount, but a 50 price (which implies a yield to maturity of over 60%)  is a whole other story!

• MedMen released their December quarter results, reminding us of an old lending joke:  If you borrow $1000, you have a creditor, but if you borrow $100M, you have a partner. MedMen shows $15.6M of cash on its books and current liabilities of $237M, including a current portion of LTD of $66M. It wasn’t exactly a major news item when the company stated  that it “…also needs to obtain an extension or a refinancing of its debt-in-default with the secured senior lender.” That lender is now Tilray, who purchased 75% of MedMen’s outstanding secured convertible notes from Gotham Green in August. So,  what does Tilray do? It would be a major embarrassment to say, “OOPS! We messed up”, but we are certainly no closer to legalization than we were in August, which seems to be Tilray’s big hope here. It appears that Tilray has little choice but to keep doing what it takes to help MedMen survive, hoping that some fantastic event somehow makes them whole. Desperate times call for desperate actions.

• We are hearing more talk of groups assembling pockets of capital to pursue the acquisition of distressed assets. Much of this is focused on California, but opportunities abound in other developed markets that have been the chief victims of price compression.

• The 3-month vs. 10-year treasury spread is still close to the most inverted since 1981, at negative 101bp (126bp last week). This inversion has successfully predicted the previous five recessions, and we don’t think it will miss this time either. But you wouldn’t know it if you have been looking at the S&P500 or meme stocks. Recession? What recession?

• The degree to which the premium end of cannabis holds up in the face of a recession is the big unknown. We don’t doubt that people will continue to consume cannabis relatively unchecked in the recession, but to what degree do they downscale into more affordable SKUs? Remember, the last recession, when people were being paid stimulus checks to stay home and smoke weed, is hardly a good predictor.