• Debt accounted for 28% of trailing 4-week capital raises, below its LTM average of 61%. Intriguingly, debt has only accounted for about 29% of capital raises over the last twelve weeks. Everything would seem to point in the other direction. Raising equity has become a heavy lift, and most companies would prefer not to sell at prices hovering around 52-week lows. The talk of banking reform and rescheduling/descheduling would also seem to rule out doing an equity issue. After all, which finance officer wants to raise equity at the lows only to see the market scream upward after the passage of SAFE? The answer, we believe, is that lenders have become more cautious, taking a harder look at business plans and collateral valuation. Perhaps we see equity raises because reasonable debt terms are no longer available to many companies. Does that also explain the recent preponderance of PIPEs?

           

The Week’s Largest Debt Raise:

• On October 21, 2022, Trees Corporation Canada (TREES: NEO), a $1.4M market cap Canadian company with 13 Trees branded storefronts in Canada, closed a non-brokered private placement of 200 units for gross proceeds of approximately US$145,700.
  • Each unit consists of a $1000 face amount 3-year convertible note with a 12% coupon, a conversion price of US$.0109 (50% premium), and 66,667 warrants with the same exercise price.
  • The warrants and conversion features combine to produce total coverage of 200%. However, the relatively high premium of 50% limits the value of the embedded options. The effective cost of the package is 16.88%, which strikes us as excellent execution for a small retail-oriented Canadian company with $7M of LTM revenues, nearly $6.7M of negative EBITDA, and $9M of Debt and Leases.