After the market closed on Friday, SNDL Inc. (NASDAQ: SNDL) told investors that it finally took steps regarding its SunStream joint venture and its underperforming Parallel cannabis assets.
The company’s joint venture Sunstream Bancorp launched SunStream USA with the expectation that Parallel will be restructured.
In March 2021, Sundial Growers Inc., now known as SNDL, formed SunStream Bancorp, a 50/50 joint venture with SAF Opportunities LP, a member of the SAF Group. SunStream Bancorp is the owner of $145 million of junior notes owned by Parallel that are in default. This exposes Sundial to the loss.
For years, Parallel has been tied up in a lawsuit with disgruntled investors over taking on too much debt ,among other things. However, despite Parallel defaulting on the debt, SunStream has continued to recognize the full value of the investment on its books.
SNDL said in its Friday statement that on Sept. 21, Talladega LP, a partnership wholly owned by affiliates of SunStream and creditors of Parallel, signed a strict foreclosure agreement with Parallel. As a result, CDXX TransCo LLC will foreclose on some of Parallel’s cannabis operations in Florida, Massachusetts, Texas, and Nevada that were pledged as collateral under Parallel’s existing debt instruments.
Once the foreclosure is closed, TransactionCo will own the operations in those states and have approximately $100 million of debt outstanding, of which $42 million will be held by Talladega. That represents a reduction of more than 80% from Parallel’s total outstanding debt.
TransactionCo’s post-closing capital structure should be supportable with a path to profitability, allowing it to take advantage of the growing cannabis market in the U.S.
SunStream USA is expected to own two-thirds of the equity interests of TransactionCo, while the remaining one-third is expected to be owned by the senior noteholders of Parallel’s existing senior secured notes
“The restructuring of nonperforming credit investments in SunStream is a notable opportunity to rebalance the risk-reward of SNDL’s existing investments,” Zach George, CEO of SNDL, said in the statement.
In the second quarter of 2023, Parallel‘s net revenue was $52 million or $208 million annualized.
SNDL listed the following items as the assets that have been foreclosed upon:
- Florida: Parallel has 45 dispensaries that operate under the Surterra Brand, along with two cultivation facilities comprising more than 330,000 square feet.
- Massachusetts: Parallel has three operating dispensaries under the New England Treatment Access brand and a 43,000-square-foot cultivation facility.
- Texas: Parallel has two retail pick-up locations in Texas that operate under the brand Goodbled and a small cultivation facility.
- Nevada: Parallel has a joint venture with Cookies and minor real estate assets.
Talladega initially provided Parallel with a $150 million loan on May 7, 2021, which was secured by a junior security interest on substantially all of Parallel’s assets, as well as a senior security interest on Parallel’s Massachusetts-based business. Parallel defaulted on the initial loan in September 2021.
Following the default, Talladega and the senior noteholders attempted to salvage the situation and explored selling the assets. During this time, Talladega and some of the senior noteholders gave Parallel a bridge loan of $78 million secured by a first-priority lien on substantially all of Parallel’s assets.
However, SNDL said that the marketing process did not result in a satisfactory outcome for Parallel’s senior creditors. That’s when Parallel, SunStream (through Talladega), and the senior noteholders began looking at other options, including a strict foreclosure transaction.
As the talks continued, Talladega gave Parallel another $38 million in super-senior bridge financing between Dec. 7, 2022, and the signing of the foreclosure agreement to fund various restructuring costs and allow Parallel to continue its operations.
The Parallel Transaction is expected to close in the fourth quarter of 2023.