…Convertible debt first started showing up in the cannabis sector in late 2017 as retail funding was drying up for licensed producers within the space. Now, with many of these convertible debentures being issued in 2018 on two year terms, the cannabis sector is nearing a period where many of these debt obligations are about to come due…As a result, the current environment has seen suppressed share prices as few large investors wish to get into high-risk investments…[as a number of these companies] are essentially ticking time bombs [given]… that conversion prices for all this issued debt are far above current equity prices in many instances. To highlight how dire the current situation is, we’ve compiled a list of several issuers below that are currently in precarious situations as a result of their current debt load and the likely inability to currently pay off the debt under current cash reserves.
What Are Convertible Debentures?
Convertible bonds, notes or debentures are a form of debt that gives the holder of the debt instrument a regular interest payment (called a “coupon”), either for a fixed amount of time, or until the stock trades above a target price that triggers a conversion event. This is the preferred outcome.
In a bear market like we have at the current time, however, the conversion of the share price is far less likely within the prescribed time period and therefore the company will have to roll over the debt into a new financing, which could happen via straight equity, a new round of convertibles, or standard bank financing (the absolute dream) and rolling over into a new round of convertibles or equity would result in a super dilution event.
Following these instruments along a balance sheet can get a bit confusing, but understanding the methods used to account for convertibles (go here) can give us good insight into their immediate and long term implications [so you are encouraged to go here for said information.]
Why Do Investors Like To Invest in Convertible Debt?
Investors who own the convertible debt receive some great advantages over typical equity holders:
- Firstly, they often get a regular cash payment for their investment.
- Secondly, they get exposure to the upside of the equity (assuming the conversion is at the discretion of the debt holder). If the stock takes off like gangbusters, the investor can convert their debt into equity and play the stock market for a nice gain.
- Thirdly, if the company fails to perform and cannot pay the debt, the convertibles might be exchanged for shares at a much lower price; giving the investor a much larger piece of the pie than if they did straight equity from the beginning.
Outstanding Convertible Debentures (Note that the data below is based on the latest financials filed by the issuer, and subsequent raises or financings may have occurred.)
As seen above, all the companies have unsecured debt (asterisks denote secured debt) and will be forced to find additional funding before their debt comes due or have to sell off assets as a means to cover their current obligations and those who fail to do so will have limited resources in the future for funding. [Zenabis Global, mentioned above, has initiated a Rights Offering – Zenabis Global Announces Special “Rights Offering” For Shareholders – Stock Tanks! to hopefully raise $20.6M.]
While time exists in all cases before repayment is required, issuers will have to begin the process of raising funds now to satisfy shareholder concerns with regards to said debt and, until that time occurs, its likely that equity pricing for…[their stocks] will continue to deteriorate as time draws near.
Editor’s Note: The above excerpts are from the original article , and have been re-formatted, color highlighted, edited ([ ])*** and abridged (…) by Lorimer Wilson, editor of munKNEE.com – Your KEY To Making Money! – for the sake of clarity, and brevity to provide a fast and easy read.
***(The author’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.)