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November 17, 2021
Deal of the Week: Why Ayr Wellness opted for a higher rate on funds
In partnership with Viridian Capital Advisors
Sometimes it pays to add to an already high coupon rate rather than engage in a new capital raise. Take last week’s action by Ayr Wellness (CSE: AYR.A; OTCQX: AYRWF), in which the company announced the sale of an additional $150 million of its existing 12.5% senior secured notes that are due Dec. 10, 2024.

This additional debt was sold as additional notes under the senior secured note indenture at 107% of par to yield 9.8% to maturity.

This yield to maturity seems high relative to the company’s credit quality, as measured by the Viridian Credit Tracker scoring model in the graph above. The bars in the chart show the current Viridian Credit Score for each company, while the line shows the effective cost of debt while taking into account any warrants or convertibility features and original issue discounts or premium at issuance.

According to this model, Ayr ranks as the fourth-best credit, but the 9.8% yield to maturity is the highest paid of any of the companies on the chart.
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In addition, the current yield (calculated by the coupon yield divided by the price) of this issue is relatively high at 11.68%. Looking at the graph, Ayr should have achieved a rate below 9%, particularly given the consistently downward drift in debt costs we have previously discussed.

So why didn’t Ayr pursue a new raise instead? This requires a closer look at the yield to worst (YTW).
The 12.5% senior secured notes, due Dec. 10, 2024, are callable at 106.25% beginning Dec. 10, 2022, and at par call beginning Dec. 10, 2023.

Viridian Capital Advisors calculates a YTW - the par call in 2023 - of only 8.9%. This means Ayr is doing what we have been advocating - paying a higher current yield in return for near-term callability at a low incremental cost in terms of YTW relative to a new issue.

Cannabis debt investors should be focused on YTW calculations, particularly given the likelihood of some form of legalization during the term of their debt investments. How does this play out for Ayr?
  • Ayr avoids the incremental cost of negotiating and papering a new debt instrument by issuing under the current indenture.
  • AYR had room under the 4X debt/EBITDA debt incurrence test and the 2X fixed charge coverage test.
Ayr said it will deploy the additional funding for capital spending, acquisitions and other general corporate purposes.
 
Avoiding fantasy valuations when selling your cannabis business
When you’re ready to sell your cannabis business, one of the first questions you’ll have to answer is: How much do you want?

In an industry that has so much potential for growth, it’s easy to key in on those pie-in-the-sky future revenues and profits, but buyers will want proof that your valuation is realistic, according to John Wagner, managing director of Colorado-headquartered 1stWest Mergers & Acquisitions.

If you’re thinking your projected EBITDA for 2023 should garner the same multiple as companies with that same level of profitability today, you’re ignoring a key piece of the calculation: the gamble.

This industry can be a roller coaster. It saw steep declines in 2019 but huge sales increases in 2020 amid the COVID-19 pandemic. Most markets are still growing, but who’s to say that will continue? And at what pace?

One of the predictions that MJBiz CEO Chris Walsh made at MJBizCon in October was that 2022 might be the first year that we actually see sales decline in mature markets.

If you’re profitable today, great. Use that as your basis. If you’re struggling today, be prepared to fight an uphill battle to get your fantasy valuation, because investors will want to hedge against future risks.
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MJBiz is the leading resource for the cannabis industry, cited by The Wall Street Journal, Forbes and Harvard Business Review. MJBiz also produces the #1 cannabis business conference, MJBizCon.
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