Cost of debt keeps going down for cannabis MSOs

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Deal of the Week / In partnership with Viridian Capital Advisors

Cost of debt continues downward trend for MSOs, as Verano upsizes debt facility

The cost of debt continues to decline for the largest multistate operators, as evidenced by Verano Holdings Corp.’s recent loan amendment.

Verano (CSE: VRNO; OTCQX: VRNOF) amended and upsized its senior secured term loan to $250 million, adding an incremental $120 million.

Viridian Capital Advisors first highlighted this downward trajectory in cost of debt in its weekly Viridian Capital Graph of the Week on Sept. 6. Since then, the trend line has continued downward (see above).

Details of Verano’s incremental facility illustrate this shift:

  • 8.5% interest rate with no equity-linked features.
  • 18-month maturity.
  • Senior secured debt position.
  • Option for an additional $100 million in term debt at the same terms.

The reduced cost of debt stands in stark contrast to the reception cannabis firms have seen in the equity market, where prices (as indicated by the AdvisorShares Pure US Cannabis ETF) have declined by 45% from their February peaks.

  • What’s driving the decline in debt costs?
  • Improvements in issuers’ credit quality.
  • Increased presence of well-funded institutional lenders, such as the participants in the Verano deal. Chicago Atlantic Advisors served as the lead administrative and collateral agent on the agreement, and AFC Gamma was a significant participant.

This week’s Viridian Capital Graph of the Week (below) shows evidence that the market is rationally pricing the credit quality of MSOs.

This chart highlights the effective rates of recent transactions against the issuer credit ranking in the Viridian Capital Credit Tracker. (Note: This graph contains data only on companies that have recently completed significant debt issues.)

Chart showing effective cost of debt vs. Viridian Credit Score

Below is a more comprehensive look at the credit quality of the public MSOs with more than a $750 market cap, placing Verano in context.

Verano ranks as the third-best credit of the group, consistent with the pricing of its upsized credit facility. It has the second-lowest debt-to-market cap and the group’s highest analyst consensus 2022 EBITDA margin.

Charts showing Viridian Credit Score, Debt/Market Cap and Altman Z Score

Viridian expects to see continued debt issuance from MSOs as they fund build-outs of newly acquired licenses and pursue accretive acquisitions.

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