Cannabis Musings - November 1, 2023
(corrected) We can work it out.
[Aaron Edelheit, friend of Cannabis Musings and author of the excellent Mindset Value newsletter, pointed out two errors that I’d like to correct. I had said that the noteholders were to receive warrants to purchase Ayr stock; however, those warrants will be issued to all other Ayr shareholders, not the noteholders. Also, the old notes were already secured. I apologize for the errors, which are corrected below, and thanks to Aaron for catching those.]
Friends – before we get into today’s missive, don’t forget that Cannabis Musings is now offering Ask the Law-Talking Guy to paid subscribers! You can find out more information here.
We’ve talked a few times about Ayr Strategies’ publicly-traded debt – its notes (basically, loans), which may be bought and sold on the Canadian Securities Exchange, had traded down from par (100 cents on the dollar) to 70-71 at the beginning of 2023. They recently traded down further to 45 (assuming the reported price quotes are accurate), suggesting that investors expected a high risk that the notes would not be repaid at maturity in December 2024.
We’ve also discussed some of the more creative strategies that cannabis borrowers need to employ in order to restructure and work out financial distress, since US bankruptcy protection isn’t available (mostly).
Well, Ayr just gave Cannabis Musings the gift of marvelous content in the form of a comprehensive restructuring of those same December 2024 Notes. Let’s dig in.
At heart, Ayr gets a few big things out of this – per the press release, the maturity date of the $243 million of notes is extended to December 2026, and they’ve now got a commitment from one of the noteholders to lend them an addition $40 million (by buying additional notes). Not too shabby – lots of runway to refinance (particularly if rates go back down, someday), and a slug of fresh capital. Let’s then walk through what this largesse costs.
The interest rate is being bumped up from 12.5% to 13%, which, in today’s rate environment, is not that big an increase. Considering that one prevailing junk bond index is around 9.4% right now, more than double its rate around two years ago, a 50-basis point increase is quite modest.
The notes remain secured by a blanket lien on Ayr’s assets, giving the noteholders downside protection.
The noteholders will receive Ayr stock equal to 24.9% of the company. All other shareholders will receive two-year warrants to purchase an additional 16.5% of Ayr’s stock at US$2.12 per share (about 72% above today’s closing price), to mitigate the dilution.
One particular noteholder has committed to lend an additional $40 million to Ayr in the form of new notes, which the other noteholders will be able to participate in; however, it’s structured as $50 million borrowed against $40 million funded. This is what’s known as “original issue discount” – the borrower issues more debt (and pays interest on it) than the amount of cash actually sent to the company in exchange. It’s a way of juicing the returns to the lender/noteholder (sort of like having a higher interest rate), here in the form of a 20% OID. OID also has fun tax implications.
That noteholder who’s providing the commitment (known as a “backstop”, they’ve agreed to fund whatever amount of the additional $40 million of notes aren’t sold to other noteholders) will receive an additional 5.1% of the company’s stock (or of a subsidiary). Offering up your balance sheet comes at a price.
The noteholders get to appoint a board member, and also get preemptive rights to purchase their pro rata share of future equity issuances.
This was all approved by the holders of 76% of the face (principal) amount of the notes, making it binding on all of them. This is a typical and fun feature of notes – some majority or supermajority (which is not as cool as it sounds) gets to change the terms for everyone, even if the minority doesn’t like it. It prevents holdouts.
In sum, Ayr gave up a sizable chunk of the company in exchange for extending the term of its debt and some additional borrowing commitment. It’s kinda sorta almost exactly like what we talked about back in a Cannabis Musings earlier this year, with Gimpel, our theoretical distressed investor with a love of appetizing (which happens to be a noun) considering how to make a distressed investment into NoshCo, maker of delicious, THC-infused knishes. It’s sort of a halfway loan-to-own transaction for Ayr’s noteholders – they now own a large portion of the stock, have a first lien on all of the assets, and a seat on the board.
Expensive? Well, you may be thinking “Amol iz di refue erger far der make.” (“Sometimes the cure is worse than the disease.”). If you thought that, I’d be impressed with your knowledge of Yiddish proverbs. I’d also remind you that, in a distressed, high-rate environment with few financing alternatives and a lack of access to bankruptcy, there isn’t really much of an alternative.
So, for me, as a former deal lawyer who thinks too much about cannabis capital markets (and, for full disclosure, with industry friends who worked on this deal (though I didn’t know that until I read the press release!)), I’m impressed with the breadth and depth of this workout. I fully expect we’ll see more of this.
Be seeing you!
Hauser Advisory provides advice and strategy on business lifecycle events and cannabis industry navigation, tapping into a deep, national network and twenty-five years of dealmaking and capital markets experience.
© 2023 Marc Hauser and Hauser Advisory. None of the foregoing is legal, investment, or any other sort of advice, and it may not be relied upon in any manner, shape, or form.