Fitch Upgrades Then Withdraws Ratings for Canopy

The ratings withdrawal comes in light of Canopy's move to private status.

Fitch Ratings has taken the Canopy Growth Corp. (Nasdaq: CGC) and subsidiary 11065220 Canada’s long-term issuer default ratings (IDR) on a rollercoaster ride of downgrades and upgrades, finally ending the saga in a complete withdrawal of all ratings, the firm wrote in a memo Tuesday.

The initial downgrade on July 7 was from ‘CCC-‘ to ‘RD’, due to debt swaps with secured and unsecured lenders as well as operational concerns.

However, following the completion of the exchange, the ratings were reassessed and upgraded back to ‘CCC-‘ and the senior secured term loan facility to ‘CCC+/RR2’ — and then all ratings were withdrawn. The ratings have been moved to private status, the firm noted.

The firm said that Canopy’s ‘CCC-‘ rating took into account its current liquidity situation, efforts to mitigate high cash burn rates, debt-reduction agreements, recent asset sales, and its uncertain road to profitability amid operational challenges.

Key factors influencing the ratings include Canopy’s privately negotiated redemption agreements with noteholders, which paid off C$193 million of the C$225 million aggregate principal amount of the convertible notes due July 15, 2023. The repayment came in the form of a C$101 million cash payment, the issuance of approximately 90.4 common shares, and the issuance of approximately C$40.4 million of debentures convertible into common shares.

Fitch determined these actions constituted a distressed debt exchange (DDE) as they imposed a “material reduction in terms compared with the original contractual terms” and were conducted to avoid insolvency or traditional payment default.

Canopy’s constrained liquidity was another major factor, with the company’s cash and short-term investments standing at C$783 million as of March 31, 2023. Adjusting for payments made after the year-end close, the company has around $666 million, according to management’s earnings call. The cash position would seem decent if the company didn’t lose $3 billion in the same breath.

The liquidity constraint came alongside Canopy’s repeated operational cash deficits and the uncertainties within the Canadian cannabis marketplace, creating a challenging operating environment for the company.

Canopy’s strategic attempts to supplement liquidity and reduce cash operating deficits include asset sales and divestitures. The company has sold five facilities since April 1, 2023, receiving C$81 million so far, and hopes to realize up to C$150 million in total proceeds by September 30, 2023.

And this entire time, Canopy has also been exploring a new business model in the U.S. by creating a U.S.-domiciled holding company, Canopy USA, LLC. That holding company is meant to hold Canopy’s conditional U.S. cannabis investments in a ringed-fence manner, potentially allowing it to acquire Acreage Holdings, Inc., and others. However, Fitch suggests that this transaction comes with significant execution risks, including regulatory, shareholder, and exchange approval.

The firm also noted how the company’s own auditors have fled the wreckage, expressing doubts on the way out about Canopy’s ability to continue as a going concern in their financial statements for the full-year 2023. Canopy also recently told investors that the Nasdaq stock exchange notified the company about its stock falling below $1 for over 30 days.

Future rating considerations are no longer relevant following Fitch’s withdrawal of Canopy’s ratings.

Adam Jackson

Adam Jackson writes about the cannabis industry for the Green Market Report. He previously covered the Missouri Statehouse for the Columbia Missourian and has written for the Missouri Independent. He most recently covered retail, restaurants and other consumer companies for Bloomberg Business News. You can find him on Twitter at @adam_sjackson and email him at adam.jackson@crain.com.


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