The Viridian Credit Tracker utilizes 11 different bespoke credit ratios to evaluate four aspects of credit quality: Liquidity, Leverage, Profitability, and Size. We are fascinated by a pattern we see in the credit data across our 12 subsectors of cannabis.  All of the sectors currently have median free cash flow adjusted current ratios of under 1x, indicating the likely need for financing during the year.  Meanwhile, leverage is quite low across the industry.

The highest median debt/ mkt cap is for the Cultivation & Retail sector at 1.04x, a number that we would not think twice about if we looking at the High Yield credit market.  The combination of these statistics indicates to us that there is room to solve most of the industries liquidity thirst with new debt issues.  The complicating factor here is that we have an extreme risk aversion in the investor base, bourne by the disasterous returns experienced in 2022 and in conjunction with that, our impression is that most of the “easy” collateral, namely real estate, has already been utilized in sale leasebacks or mortgage debt.  Assets available for pledging now are less attractive: real estate and working capital and a significant part of working capital is inventories which is not available to collateralize. It will be fascinating to see these factors play out over the course of 2023.

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