Increasing cannabis stock prices have caused issuers to raise greater amounts of equity capital and less debt. Debt issuance declined steeply from its peak of $1.4 billion in Q2:19 to an average of under $350 million per quarter for the last several quarters.
Public cannabis companies trade at high EBITDA multiples. Public companies are taking advantage of historically high EBITDA multiples to raise growth capital through equity issuances.
Canadian debt issuance has fallen more significantly than that of the U.S. and credit IS part of the problem. Pummeled by excess capacity induced price declines, inadequate retail capacity, and bloated cost structures, several of the big LPs appear to have made only marginal progress towards positive EBITDA.
However, debt issuances will increase as equity markets ebb and flow, and offer an attractive (non-dilutive) source of capital for the industry. Major institutional debt funds are just beginning to enter the market attracted by those companies with strong real estate portfolios, healthier balance sheets and consistent fundamentals.
Credit quality is NOT the issue for U.S. companies. We estimate that the top ten U.S. companies by market cap have an incremental debt capacity of about $3.4 billion (4x consensus 2021 EBITDA less existing debt and leases). Debt/market cap of the group is less than 10%. These are debt statistics that rival the high end of the high yield credit market.