What Really Matters for Cannabis Companies

Thanks to SAFER and Rescheduling, cannabis executives (and online cheerleaders) haven’t been this giddy in two years.  

Lost in the euphoria is something more important for weed firms, not to mention more impactful to the medium term structure of the industry.

I am talking about record interest rates and their impact on costs and the availability of risk capital.

Last week, long-term Canadian and American interest rates reached their highest level in 16 years.  And they may be headed even higher. Fed Chairman Jerome Powell ominously said on September 20 “'we're prepared to raise rates further if appropriate and we intend to hold policy at a restrictive level until we're confident inflation is moving down sustainably.” Rising long-term bond yields have already locked in the expectation that high rates are here to stay.

These rate increases could simply be a cyclical upswing. However, there are growing indications that interest rates will not decline over the next couple of years.  Governments have serious fiscal issues, personal/household debt remains high and there is a strong likelihood of continued geo-political and environmental shocks.

Prior to the recent run up in rates, cannabis debt funding (if you could get it) was priced in the mid to high teens and carried strict terms & covenants.  Equity capital was tough but not impossible to find. 

Things are about to get worse. Welcome to the ‘new normal’

Even if SAFER brings in more lenders, the cost of capital will rise as rates have almost doubled over the last 12 mos. Producers with high amounts of floating rate debt or those with slim margins will be particularly vulnerable.

All that investment fund ‘dry powder’ won’t be flowing into cannabis any time soon except to a small number of MSOs & LPs with strong balance sheets, operating margins and cash flows.  

High rates will also drive a lot of risk and institutional capital to safer investment harbours.  Those remaining equity investors with a healthy risk tolerance will have many sexy, less jaded sectors to choose from, including AI and psychedelics.  

Finally, higher rates could depress public market valuations making cannabis stock less appealing as medium of exchange in M&A deals.

For the next couple of years, permanently higher rates would trigger a profound shift in the strategy and size of many cannabis firms, who were born in an era of plentiful, low-cost capital. For example, rising borrowing costs will arrive just as the need for investment surges.

Lets chat about how we can turn the ‘new normal’ to your advantage.

#interestrates #capitalmarkets #borrowing #debt #equity