After the market closed on Wednesday, Fitch Ratings downgraded the Long-Term Issuer Default Ratings (IDR) for Canopy Growth Corporation (NASDAQ: CGC) and 11065220 Canada Inc. to ‘RD’ from ‘C’ on the completion of Canopy’s exchange offer for a portion of the convertible notes due July 2023. This means Fitch considers it a distressed debt situation.
Fitch said it has reassessed and upgraded the IDRs to ‘CCC’ post completion of the exchange. Fitch has also affirmed the ‘B’/’RR1’ratings for the senior secured term loan facility at Canopy and the co-issuer, 11065220 Canada, Inc.
The statement said, “The post-exchange IDR of ‘CCC’ reflects Canopy’s ongoing operational risks with executing its operating strategies, the high cash burn rates and the uncertain path to profitability that has reduced liquidity. The exchange only partially addresses the 2023 maturity, with C$337 million remaining outstanding of which Constellation Brands, Inc. (NYSE: STZ) continues to hold C$100 million.”
It went on to say, “As such, Fitch could take further negative rating actions if Canopy pursues a repayment/refinancing of the remaining 2023 notes that Fitch considers a distress debt exchange per criteria, a lack of execution on the premiumization cultivation strategy, or if Fitch views that the strategic incentive for CBI to support Canopy has lessened. The current rating incorporates a one-notch uplift from the standalone credit profile (SCP) at ‘CCC-‘.”
2021 Canadian cannabis retail sales grew by around 50% to C$4 billion, according to Statistics Canada. However, Canopy materially underperformed Fitch’s and the company’s own expectations of growth in line with or better than the market, with revenues in the Canadian cannabis channel decreasing by 10% in fiscal 2022 to C$258 million. Canopy lost share, in part, due to its pivot away from the value segment.
Fitch noted that marketplace dynamics are challenging, including evolving consumer preferences, and the competitive environment with significant pricing compression, particularly in the value segment has caused material profitability pressures. Consequently, Canopy has recognized significant asset impairments.