Canopy Growth (NASDAQ: CGC) stock jumped 52% yesterday. CGC stock moved on their ability to solve - part of, perhaps - the capital structure of the company. Essentially we saw a debt for equity swap. While this is dilutive it does remove one potential cause of an actual bankruptcy. That plus the sale of the Modesto CA plant therefore weakens the pressure on the balance sheet. We're deeply, deeply, unsure as to whether this is going to be enough but it is at least better.
The specific problem was that there were some loan notes which couldn;t, not in cash they couldn't, be repaid: “The Canopy Notes bear interest at a rate of 4.25% per annum, payable semi-annually on January 15th and July 15th of each year commencing from January 15, 2019. The Canopy Notes will mature on July 15, 2023.” In theory those could be paid, but if they were then that would breach other loan covenants about minimum liquidity. And it's all, well, rather imminent.
This was solved: “Accordingly, 4.25% unsecured senior notes due 2023 with a principal amount of C$12.5M will be cancelled after completing the transaction, which is categorized as a private placement. In return, the noteholders will receive ~24.3M Canopy (CGC) shares and cash, including the interest they are eligible to receive from the notes.” As we say, that's
dilutive but having less of something that still exists is better than more of something that doesn't.
Canopy Growth stock price from NASDAQ
As to the larger issues we've long been very bearish on the entire sector. The problem with cannabis isn't that people won't buy it. The newly legal markets do exist and material is moving through the system. There are two problems with it though. One is that cannabis - the legal stuff anyway - is now a market designed by bureaucrats. Thus doesn't work because bureaucrats don't know anything about markets. Taxes are too high, licences and permits too difficult to get and so on. California - where Capital Growth has been trying to work - has achieved the unlikely feat of making the legal dope more expensive and worse than the still existing illegal market.
The other issue is the amount of competition. Far too many people saw all of this happening and decided to pile in. There's just too much capital chasing a market too small for it. At which point no one makes any money out of it. We don't think that any of this is going to change in the immediate future. Not until most of the hopefuls go bust and there's a clear out of the supply side of the market.
Sure, CGC stock is up 50% but that's more a sigh of relief in the short term than anything else.
