Cannabis Musings - October 8, 2024
The heat is on.
Friends, the creditors are circling the wagons. Recently, we’ve seen lender Pelorus Fund REIT file for receivership against StateHouse Holdings (née Harborside) for reportedly defaulting on four loans. Delivery powerhouse Eaze shut down operations after its major investor acquired its assets in a foreclosure sale, a sale brought about by that same investor after Eaze defaulted on a loan to them, which we talked about previously (they raised $255 million with a peak $700 million valuation at one point). Now, The Cannabist Company (née Columbia Care), one of the largest MSOs in the US, is under pressure from debtholders, which we know because they (the creditors) told us.
Cannabis investment firm FiSai made public last week a letter they sent to Cannabist on September 26th, 2024. Cannabist has $185 million of 9.50% senior secured, first-lien notes (basically, loans) due February 2026, as well as about $60 million of 6.0% Secured Convertible Notes Due June 2025 (the letter says May 2025, but the latest 10-Q says they’re due June 29, 2025), as well as other debt outstanding. FiSai apparently owns $50 million of those February 2026 Notes, and is fardeiget (“worried”) about the pending “maturity wall” (a finance term for “a shmear of debt coming due all at once”). I’m guessing FiSai also is unhappy because the notes they own, which have a lien on Cannabist’s assets, mature after the 2025 Notes, which have the same lien on Cannabist’s assets. Lenders don’t like when other creditors might have rights ahead of them – they don’t want others to control their destiny.
In short, FiSai wants a sitdown with the company:
Please accept this letter as formal notice to the Board and CEO to engage with stakeholders to resolve these issues in a timely and comprehensive manner.
Corporations are required to meet with its shareholders at least annually, but nothing requires Cannabist to sit down for a nosh with its debtholders (unless the loan agreement requires it). Particularly since Cannabist hasn’t defaulted on its loans, FiSai doesn’t really have a way to force a meeting that is almost certainly going to be about:
Giving FiSai seats on Cannabist’s board of directors;
Restructuring a bunch of Cannabist’s debt to give FiSai and the other noteholders a large swath of the equity; or
Both.
Indeed, FiSai’s letter tells us as much:
On September 3, 2024, FiSai provided Mr. Hart with indicative refinancing alternatives, with proposed structures that would leverage existing financial assets to facilitate debt reduction and secure maturity extensions through 2027. To date, Mr. Hart and Mr. Abbott have refused to engage or discuss the proposed refinancing strategies, which is alarming and consistent with Cannabist’s short-sighted and reactive lack of strategy.
Now, they don’t tell us (the public) anything about those proposals, but one would have to guess they’re in the vicinity of what Ayr did – extend the debt in exchange for a pile of equity (which we talked about last November).
You don’t send this kind of letter, and then make it public, if you want to tell the Board and management how great a job they’re doing. Instead, you say things like their “tenure encompasses notable and repeated strategic failures,” pointing out the termination of the $2 billion merger deal with Cresco; “operating margins [that] are consistently at the lower end” of the MSO peer group; and claim that the “recent sale [of assets] to Verano was essentially a forced, expedited sale of the Company’s crown jewels in order to avert a catastrophic cash shortage and pending corporate default.” This is fairly typical for what’s effectively an activist letter (a not-so-friendly letter sent by an investor to a public company demanding changes in response to a litany of maladies).
Finally, FiSai makes an interesting point about the dearth of capital available to cannabis companies, a problem long-time readers of these Cannabis Musings are well aware of:
Equally concerning is the fact that the largest public MSOs anticipate a maturity wall exceeding $3 billion in 2026, which will necessitate substantial refinancing efforts in 2025. This presents a formidable competitive landscape for Cannabist, likely affecting both the availability and cost of capital associated with any potential refinancing.
FiSai makes the very relevant point that there’s a lot of cannabis company debt coming due in 2026 (again, the “maturity wall”), while there really aren’t that many sources for refinancing capital. Too much demand for not enough supply. GTI recently refinanced its debt at an attractive (for cannabis) rate, but it’s also got the healthiest public MSO balance sheet in the industry. FiSai doesn’t seem as sanguine about Cannabist’s prospects for pulling off such a feat.
I personally love stuff like this because it’s so normal. The activist letter is a tried-and-true strategy to spook management and the Board. Particularly coming from a debtholder with liens on the assets. Stuff like this happens all the time on Wall Street, so, to me, it’s another example of how our industry is less and less an outlier. Like that time when we saw the first collateralized cannabis debt obligation. And I still remember, years ago, when we saw our first securities fraud class action against a public cannabis company. Maybe soon we’ll see an intrepid counterparty start writing credit default swaps on cannabis loans. Congratulations, Cannabis – you’re slightly less abnormal.
What will happen from this? Hard to know until something actually happens (or FiSai tells us). On the one hand, me ken dem barg mit a shpendel nit avektrogen (“a mountain can’t be moved with a splinter”). On the other hand, for the activist investor, it pays to be the splinter: durch shveigen ken men nit shteigen (“you can’t get ahead with keeping quiet”).
Be seeing you.
© 2024 Marc Hauser. 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. The foregoing represents my own views and not those of Jardín.