With the US election less than one month away, we are highly focused on who the winner of Presidential election will be as well as the states that will pass legal cannabis legislation (medical and recreational).
A handful of states are voting on the legalization of medical or recreational cannabis and we expect to see a majority of these ballot initiatives get passed by voters. Although we believe that the cannabis industry has benefited from this potential outcome, not all companies will benefit from this trend.
During the last year, the cannabis sector has been under considerable pressure. Although we believe the industry has significant potential catalysts for growth, the recent trend has forced several companies to file for bankruptcy. Going forward, we expect additional companies file for bankruptcy and believe that some of the businesses that could file are considered to be high-profile players in the space.
From a capital markets standpoint, one of the most significant changes is related to the securities that are being sold by a company to raise capital. From 2015 to 2018, the vast majority of cannabis companies raised capital through private placement equity offerings. At the height of the cannabis industry from a capital point of view, companies were easily completing oversubscribed private placements of $100+ million of equity capital.
During the last two years, equity capital markets have all but dried up for cannabis companies (especially Canadian based businesses). Companies have been forced to raise debt capital in order to fund growth initiatives and the interest rates that are associated with these loans are well above the average rate.
Since cannabis is legal at the federal level in Canada, companies can raise debt capital at lower rates than US companies. So far this year, there has been an increase in the number of companies that cannot pay the interest expense that is associated with previously issued loans and the market has punished the companies for it.
Over the next year, we expect to see additional cannabis companies (US and Canadian) file for bankruptcy and believe that our readers need to be aware of this. Some of the companies that we expect to see file for bankruptcy are some of the best known names in the industry.
Companies like Aurora Cannabis Inc. (ACB.TO) (ACB) and MedMen Enterprises (MMEN.CN) (MMNNF) are two examples of high-profile names in the cannabis industry that have taken on a lot of debt. Going forward, we are not sure if the businesses will be able to service the debt and this is a trend that we will be following.