Credit Tracker

Weekly Credit Report – Credit Rankings of US MSOs and Canadian Lps with Market Caps between $50M and $1B

• The table below ranks the credit quality of the 19 US MSOs and Canadian LPs with market caps between $50M and $1B

• The rankings in the Viridian Credit Scoring model are purely quantitative and derived from the 4-factor rankings displayed above: Liquidity, Leverage, Profitability, and Size. We have also included the Altman Z score, although it is not a variable in our model.
• The most highly weighted factors in our scoring are Liquidity and leverage, and we have two bespoke variables that are particularly emphasized.
• Our model uses two variables to weigh liquidity. Still, the highest-weighted one is the Annualized Free Cash Flow Adjusted Current Ratio, which annualizes free cash flow and adds it to the numerator of the current ratio to account for cash burn in the company’s liquidity. If a company has a ratio below 1x, it indicates a likely need for additional funding to meet current liabilities. But liquidity measures can be somewhat deceiving. Canopy Growth, for example, has the 2nd-best liquidity score. But when we delve into how that liquidity is produced, we quickly see that the company has been financing negative cash flow operations for several years by continually issuing dilutive equity. It’s great for them that they have been able to do that, but one must wonder how long they can keep that up.
• The Viridian model combines four leverage ratios to calculate the leverage ranking, with the highest-weighted ratio being total liabilities to market cap. This ratio takes into account all liabilities, including taxes and operating leases, and we believe both are important in the cannabis industry. We have shown, using option pricing, how this ratio can be transformed into an implied asset value coverage of liabilities. Here again, there are some subtleties. A company like Canopy, with negative free cash flow but the ongoing ability to raise large amounts of equity, will score well here. And it does show financial flexibility, but one might question the sustainability. Note the relatively good numbers of the Canadian LPs. Their equity values are boosted by a lack of 280E taxes and an ability to list on senior exchanges.
• Six of the top ten credits are Canadian, boosted by the advantages of federal legality and the ability to list on senior exchanges.