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: A Pretty Good Early Warning Indicator of Defaults, With Some Caveats
- Several Large defaults were in the headlines this week in Cannaland:
- On March 27, 2025, Gold Flora (GRAM: Cboe)(GRAM: OTCQX) filed for voluntary receivership. IIPR declared Gold Flora in default of three leases with a total invested value of approximately $117M and an average embedded cost of about $254/ sq ft
- IIPR also declared a default on four leases of 4Front (FFNT: CSE)(FFNTF: OTCQB), including FFNT’s flagship 250k sq ft facility in Matteson, Illinois.
- Finally, IIRP defaulted TILT Holdings (TILT: Cboe)(TLLTF: OTCQB) on two leases, including a 40k sq ft facility in Taunton, MA, and a 15k sq ft facility in White Haven, PA.
- None of these defaults are shocking. The graph shows historical values of total liabilities/ market cap, one of the best indicators of distress/default that we are aware of. The ratio can be converted via option pricing into a measure of the market’s implied asset value/ total liabilities coverage.
- Given the assumptions above, we find that total liabilities to market cap of about 5x is the boundary between fully covered liabilities and inadequate coverage. We, therefore, view 5x as the first warning indicator. Note that insufficient asset coverage is not a trigger for default, and companies can continue with this for extended periods.
- We view 10x as the second warning signal, as companies that pass 10x are frequently, in our experience, in distress.
- The graph shows that Gold Flora has been flirting with the 5x level since the end of 2022 but first crossed the 10x mark in October 2024. The company has experienced commensurate downgrades on the Viridian Credit Ranking model over this period
- Similarly, FFNT first crossed the 10x barrier in November 2024 and has generally been over 20x since then.
- TILT has been over 10x since the end of 2022, with only a few interludes at 8-10x, illustrating one of the caveats of the ratio. Insolvency does not necessarily trigger a default.
- We added three companies to the graph to illustrate other caveats of using the ratio as a default predictor. Cannabist went over 10x in November and is now around 32x. However, the company’s recent debt exchange appears to give CBST significant running room. The indicator is calling out insufficient asset coverage of debt, but there may not be a near-term default trigger. Ascend (AAWH: OTCQX) is a similar example. The company crossed the 10x barrier in December and has hung around 11-12x since. Like Cannabist, Ascend has virtually no debt maturities until 2029. A stock trading poorly in a horrifically illiquid market can potentially issue a false distress signal. AYR (AYR.A: CSE) is a more classic case of insufficient asset coverage and an upcoming potential default at maturity.
- It is pretty rare for a default to occur with no warning signs, and the liabilities to market cap ratio provides an important warning sign for investors.
