The cannabis credit market is experiencing a revival with several major refinancings taking place, including Ascend, TerrAscend, and Jushi. The market has become more sophisticated, with a wider range of yields demanded based on perceived credit quality. For instance, Green Thumb’s debt yields well under 10%, while Cannabist’s yields exceed 25%.
This article focuses on two key leverage metrics: Total Liabilities to Market Cap and Total Debt/2024 EBITDA. The relationship between these metrics and the offered side trading yields for each company’s debt is analyzed. The graph presented in the article clearly illustrates that trading yields have a stronger correlation with Total Liabilities to Market Cap than with Debt/EBITDA. This suggests that the former is a more reliable early warning sign of credit difficulties.
Viridian Capital emphasizes the significance of the Total Liabilities to Market Cap ratio. This metric is calculable for all publicly listed companies, unlike Debt/EBITDA, which requires sell-side analyst coverage. Additionally, Total Liabilities to Market Cap is more responsive to daily equity price fluctuations, as opposed to Debt/EBITDA, which generally changes quarterly. Furthermore, this ratio encompasses all balance sheet lease liabilities and recognized tax liabilities. Its prominence in credit research literature and inclusion in various bankruptcy prediction models, such as Altman’s Z-score, further underscore its importance.
Viridian classifies companies with a Total Liabilities to Market Cap ratio below 2x as possessing significant financial flexibility and strong asset value coverage of their liabilities. Companies with a ratio between 2x and 7x typically don’t face imminent default risk but may have limited financial flexibility to navigate unforeseen events and could experience refinancing challenges at debt maturities. Investors are advised to closely monitor this ratio as an early warning indicator, paying attention to its weekly changes for consistency in direction and magnitude.
The article highlights a significant deterioration in the ratio for Schwazze over the past month, emphasizing the need for vigilance. A ratio of 7x is considered a serious risk of default or restructuring. Investors should scrutinize their positions in companies exceeding this threshold, as they may experience liquidity pressures requiring highly dilutive rescue financing.
While a comprehensive financial model is essential for anticipating credit pressure points, consistently monitoring the Total Liabilities to Market Cap ratio provides investors with a valuable early warning signal. The Viridian Cannabis Deal Tracker, which provides market intelligence for cannabis companies, investors, and acquirers, highlights key investment, valuation, and M&A trends, offering valuable insights into capital allocation and M&A strategies.
