November 2, 2018 / 2:40 PM / 15 days ago

Banks pass on marijuana loans, for now

NEW YORK, Nov 2 (LPC) - Wall Street is warming up to the idea of financing marijuana producers as the sector blossoms, but concerns with regulation and reputational damage could stop banks from lending in the short term.

Banks have been wary of financing cannabis companies, which grow or sell marijuana, as it is still a federally restricted substance in the United States. This has forced companies to turn to other funding sources including private equity firms, credit unions, or direct lenders, which can command rates of up to 15%.

But with the legal marijuana market forecast to reach US$146.4bn by the end of 2025, according to Grand View Research, the opportunity may be too tempting for banks to pass on for much longer.

“We’re starting to see that banks are really eager to [finance these companies], but a lot of times a deal is going through and someone in the general counsel’s office will pump the brakes,” an executive from a medical marijuana company said.

In October, Bank of America Merrill Lynch joined investment firm Cowen and Canada-based BMO Capital Markets as a bookrunner when Canadian medical marijuana company Tilray chose to raise capital through the sale of US$450m of 5% convertible senior notes.

The bonds, which mature in 2023, were marketed to provide working capital, back potential acquisitions, and add cash to the balance sheet.

BAML may be comfortable with the deal because the company is headquartered in Canada where recreational marijuana became legal for sale in October, according to banking sources.

“I think we’re starting to see it open up,” the executive said.

REGULATION AND REPUTATION

In the U.S., the legality of marijuana is a bit hazy, and varies by state. California legalized recreational marijuana at the beginning of the year – and more than half of U.S. states now permit medical marijuana - but U.S. federal law prohibits all use and sales.

A leveraged finance banker said this is limiting his firm, which has a rule prohibiting the financing of businesses related to illegal substances. Lenders without rules barring marijuana firms from raising loans or bonds could still be deterred by reputational risk.

Banks have historically declined to lend to sectors that could be viewed negatively. BAML, for instance, said in April that it was not going to lend to some “military-style” gun makers, after the U.S. suffered an epidemic of mass shootings in 2017.

“You have to be concerned with the reputational risk. We haven’t been approached yet by any (marijuana) companies, but why would we do that?” a second banker said.

Rather than tapping the US$1.1trn leveraged loan market, which offers average yields of 7%, Tilray went to its private equity backer, Privateer Holdings, to provide its loans, which were recently repaid with the proceeds of its initial public offering.

The company had total loans of US$37m from Privateer as of June 30, which included US$26.8m of debt due under a Privateer Holdings credit facility, US$8.1m under a Privateer Holdings construction facility, and US$2.1m of debt in Privateer Holdings start-up loans.

FUNDING OPTIONS

Not all marijuana companies have private equity sponsors willing to provide loans, which is forcing companies to seek more expensive options as formerly cash-based businesses scale up to finance larger production and consumption.

Canadian medical cannabis company Aphria Inc announced July 30 that it had tapped WFCU Credit Union for a US$25m five-year term loan paying interest of 4.68%, which followed a similar loan from WFCU last year.

Another Canadian medical marijuana company Canopy Growth has a US$5.5m revolving credit facility priced at 1.2% over the Canadian benchmark. The company also has a US$1.5m term loan due in October 2024 priced at 10%.

Canopy Growth went to the convertible market before Tilray in June 2018 and issued US$600m of notes due in July 2023 at 4.25%. Cowen and BMO acted as joint bookrunners on that deal with BAML.

The size of marijuana companies is growing as more U.S. states take steps towards legalization, which will boost the sector’s financing requirement. Last week Massachusetts-based medical cannabis producer Curaleaf lined up US$400m in a private placement initial public offering, which valued the company at about US$4bn.

With attractive multibillion dollar valuations, it’s just a matter of time before banks figure out a way to get involved, the cannabis company executive said.

“Banks are interested,” he said. “They are just trying to figure out how.”

BAML declined to comment. (Reporting by Jonathan Schwarzberg Editing by Tessa Walsh and Michelle Sierra)

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