Banks give loans for marijuana, for the moment

NEW YORK, Nov. 2 (LPC) – Wall Street is gearing up to fund marijuana growers as the sector flourishes, but concerns over regulation and damage to reputation could prevent banks from growing. to lend in the short term.

Banks are wary of financing cannabis-producing companies that grow or sell marijuana, which remains a federally regulated substance in the United States. This has forced companies to use other sources of financing, including private equity firms, credit unions or direct lenders, which can reach rates of up to 15%.

But, according to Grand View Research, the legal marijuana market is expected to reach US $ 146.4 billion by the end of 2025. It may be too tempting for banks to let it go much longer.

"We are starting to see that banks are really eager to [finance these companies]but very often, an agreement is reached and someone from the general attorney's office will brake the brakes, "said a manager of a marijuana business for medical purposes.

In October, Bank of America Merrill Lynch joined the investment firm Cowen and Canadian company BMO Capital Markets as a bookrunner when Canadian medical marijuana company Tilray chose to raise capital through the sale of bank notes. first rank convertible at 5%, worth US $ 450 million.

The bonds, which mature in 2023, have been marketed to provide working capital, offset potential acquisitions and add liquidity to the balance sheet.

BAML may be comfortable with this deal as its head office is located in Canada, where recreational marijuana sales became legal in October, according to banking sources.

"I think we are starting to see him open," said the executive.

REGULATION AND REPUTATION

In the United States, the legality of marijuana is a little blurry and varies from state to state. California legalized marijuana for recreational purposes earlier this year – and more than half of the US now allows marijuana for medical purposes – but US federal law bans all use and sale.

A leveraged financial banker said that this limited his company, which has a rule prohibiting the financing of companies related to illegal substances. Lenders without rules preventing marijuana companies from borrowing or borrowing could still be deterred by reputational risk.

Banks have always refused to lend to sectors that could be perceived negatively. BAML, for example, said in April that it was not going to lend to arms manufacturers "after the United States suffered a mass shootout in 2017".

"You have to worry about reputational risk. No (marijuana) business has yet contacted us, but why would we do that? "Said a second banker.

Rather than tap the US $ 1.1 billion leveraged loan market, which offers average yields of 7%, Tilray turned to its private equity backer, Privateer Holdings, to provide its loans, which have recently been repaid with the help of proceeds from its initial public offering.

The company had contracted a total of $ 37 million in loans from Privateer as of June 30, of which $ 26.8 million was debt under a Privateer Holdings credit facility, $ 8.1 million under management. a Privateer Holdings construction facility and Privateer Holdings debt of $ 2.1 million. start-up loans.

FINANCING OPTIONS

Not all marijuana companies have private equity promoters willing to lend, forcing them to look for more expensive options as formerly cash-based firms expand to finance higher production and consumption.

The Canadian medical cannabis company Aphria Inc. announced on July 30 that it had called on WFCU Credit Union for a US $ 25 million term loan bearing interest at 4.68%, following a similar loan from WFCU. ;last year.

Canopy Growth, another Canadian medical marijuana company, has a $ 5.5 million US revolving credit facility at a price of 1.2% above the Canadian benchmark. The company also took out a $ 1.5 million term loan, maturing in October 2024, at a price of 10%.

Canopy Growth went into the convertible securities market before Tilray in June 2018 and issued US $ 600 million notes, maturing in July 2023, at 4.25%. Cowen and BMO acted as the responsible for the publication of this contract with BAML.

The size of marijuana companies is increasing as more and more states in the US take steps to legalize, which will increase the sector's financing needs. Last week, Curaleaf, a Massachusetts-based medical cannabis producer, announced an initial public offering of a $ 400 million public offering. It was worth about $ 4 billion.

With attractive valuations of billions of dollars, it's only a matter of time before banks find a way to get involved, said the head of the cannabis company.

"Banks are interested," he said. "They are just trying to understand how."

BAML declined to comment. (Report by Jonathan Schwarzberg, edited by Tessa Walsh and Michelle Sierra)