Fitch Archives - Green Market Report

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-‘.”

Underperformance

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.

Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDR) for Canopy Growth Corporation (NASDAQ: CGC) and 11065220 Canada Inc. to ‘C’ from ‘CCC’. Fitch said it has affirmed the ‘B’/’RR1’ratings for the senior secured term loan facility. The downgrade comes after Canopy’s announcement that it had entered into privately negotiated exchange agreements with a limited number of convertible noteholders including Constellation Brands, Inc. (NYSE: STZ) through its wholly-owned subsidiary to acquire approximately CAD263 million principal amount of the notes in exchange for Canopy common shares and approximately C$3 million in cash.

Fitch said it considers the transaction a distressed debt exchange (DDE) per Fitch’s criteria given the repayment of debt for equity. Following the transaction’s outcome, Fitch also said it expects to downgrade Canopy’s IDR to ‘RD’ (Restricted Default).

Canopy made the move in order to address a 2023 maturity. $C263 million of the C$600 million in convertible notes were tendered as part of this agreement including C$100 million principal amount of the C$200 million notes held by Constellation’s subsidiary. Fitch views the transaction as necessary to avoid a liquidity event; other options for Canopy to address the notes’ July 2023 maturity are limited given its ongoing liquidity needs due to high cash burn and current market prices on its securities.

Canopy Has a Plan

Fitch did note that Canopy has identified ways to improve its situation. The company has lost some market share in Canada and industry dynamics are challenging. Fitch noted that evolving consumer preferences and the competitive environment with significant pricing compression, particularly in the value segment that has caused material profitability pressures. Canopy announced restructuring actions that it expects to generate C$100 million to C$150 million in savings during the next 12 to 18 months, focusing on right-sizing cost structure, reducing cultivation costs, and increasing efficiencies across the supply chain.

Fitch acknowledged the company’s investments in U.S. cannabis companies, but with legalization potentially years away, these investments don’t contribute to the company. The company has C$1.4 billion in its war chest, so it isn’t in a dire situation. Fitch said it expects Canopy will continue to assess options for the repayment of the remaining outstanding notes and may seek further options to preserve liquidity given the ongoing high cash burn.

Cantor Lowers Target

Cantor Fitzgerald issued a report today adjusting its numbers and lowering the price target on the company. Analyst Pablo Zuanic is keeping his Neutral rating but cutting the 12-month price target to C$3.75 (US$2.87) from C$6.75 due to the stock/sector derating and reduced estimates. He wrote, “We doubt STZ will want to consolidate Canopy Growth in the near term, so we assume the remaining C$100Mn convertible notes still held by STZ will be paid back in cash (otherwise STZ would end up with a 51% stake, if similar terms were used). We used to think someday STZ would want to take full control of Canopy Growth, but we are not so sure anymore (of course, first at least the company must show it can be self-sustaining, and stop the cash bleed).”

Zuanic said that the debt was manageable for now, but with the rate of cash the company is burning, that picture could change. As noted above, Canopy has embarked on a plan to reduce its spending. Unfortunately, relief might not come so quickly. Canopy has indicated that sales are trending flat sequentially and the cost savings may not help until the back half of the year. “If so, this may mean cash burn will remain a concern for Canopy Growth.”

Constellation Speculation

Cantor also speculated on the future of the Constellation and Canopy marriage. He wrote, “We used to think someday STZ would want to take full control of Canopy Growth, but we are not so sure anymore (of course, first at least the company must show it can be self-sustaining, and stop the cash bleed). We say this because we wonder about the Sands family’s (controllers of STZ) ultimate plans now that they have merged the share classes at STZ. Could they sell out entirely and let someone else decide what to do with Canopy Growth? Or if the Sands stay with STZ, does STZ take full control of Canopy Growth?”