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 Collapse of Confidence in Weak MSOs
- Last week’s Chart of the Week explored the implication of current market pricing on asset coverage of liabilities.
- Viridian’s analysis represented MSO equities as call options on the value of the firm’s assets with strike prices of their liabilities.
- Additional assumptions included a two-year maturity (corresponding to the 2026 debt maturity wave) and a 40% volatility (a generous assumption since higher volatilities result in lower asset coverage.)
- Given equity values and book liabilities, we iterated the calculation of the Black Scholes option pricing formula until we arrived at a consistent asset valuation. We were then able to calculate the asset value coverage of liabilities.
- Our methodology showed that the equities on this week’s chart are out-of-the-money options with less than 1x asset coverage of liabilities. This presents a heightened risk for refinancing of debt.
- This Week’s chart shows the path of asset coverage over the last two years.
- AYR Wellness (AYR.A: CSE) (represented by the green line) experienced a problematic standoff with its debtholders at the end of 2023. AYR was proactively looking to extend its significant debt maturities coming due in 2024, but in retrospect, Its situation was complicated by its less than 1x asset coverage. AYR ended up having to give up around ¼ of its equity to get the deal done. Now, looking out at its debt maturities in 2026, the company faces an even more challenging issue in that its market-implied asset coverage is considerably weaker than it was in the last round of negotiations. The graph clearly shows how much the Florida vote hurt.
- Schwazze (SHWZ: CSE) has experienced an even steeper decline. Last week the company admitted it was in default of its senior note indenture due to its failure to file its financial statements in a timely manner. The company’s market cap on Friday the 13th was less than $1M, illustrating an important point. SHWZ’s implied .3x asset coverage may simply be based on capitulation trading in a monolithically illiquid stock. Our asset coverage shows what the market is implying, but that doesn’t mean the market is right.
- Cannabist (CBST: Cboe) is another company that has proactively taken steps to fix its capital structure issues. Asset sales, new debt issuance, and exchanges have all helped to reduce liquidity pressures, but at a current reading of .54x, the market is clearly skeptical.
- Investors need to keep in mind that a company’s ability to refinance debt has a lot to do with market psychology. We have shown that current market prices can be reverse-engineered to show the market’s current perception of asset value coverage of liabilities, and that perception is troubling for the companies on this week’s chart.
