. The Importance of Cannabis Debt Scoring During the Capital Crunch
January 19, 2020 at 7:15 pm
Published by NCV Newswire
Guest Post by Frank Colombo,Â Partner and Chief Risk Officer of Aspen Finance LLC
The cannabis debt wave is coming!
Despite solid efforts to reduce cash burn, cannabis companies will require significant amounts of financing in 2020 to complete their build-outs and strategic acquisitions butâ€¦
The equity market is virtually closed to a large swath of cannabis companies. Even those with solid business positions and clear paths to profitability will find selling equity painful at the new price levels. Expect to see a marked increase in distressed asset sales from companies who probably could have sold equity in early 2019.
The cannabis crash of 2019 occurred because the growth and margin assumptions required to support earlier valuations were too extreme. Investor expectations regarding growth rates, time to cash positive, stabilized EBITDA margins, costs of capital, and the difficulty of eliminating the illegal market, have been adjusted, and cannabis equities are now more fairly priced. The market may recover a bit from here; however, barring a major catalyst like full federal legalization (which doesnâ€™t seem likely in the near term), those heady IPO/RTO prices are gone for good.
There is lots of room for debt in the cannabis capital structures. Debt, including equity-linked debt, like convertibles, accounts for only 12.9% of market capitalization for the top 25 U.S. public cannabis companies: