PharmHouse debt deal shows industry maturing

HIGHLIGHTS

1. PharmHouse secured an $80-million debt facility from a syndicate that includes BMO and CIBC. 
2. Cassels Brock lawyer says Scotiabank is not far behind.
3. Lending money in the cannabis space still a challenge due to collateral. 

The $80-million credit facility PharmHouse Inc. secured this week from a syndicate that includes Bank of Montreal and Canadian Imperial Bank of Commerce is a significant sign of the cannabis industry maturing, according a lawyer who helped secure the loan.

On Monday, PharmHouse – a joint venture between Canopy Rivers Corp. and a private company backed by agriculture executives from Leamington, Ont. – announced that it had secured a three-year $80-million debt facility at an interest rate “in the mid-to-high 5 per cent per annum range.”

The deal is the second-largest traditional debt financing the “big five” banks have done in the cannabis space; Aurora Cannabis Inc. secured a $250-million debt facility from BMO last July.

Over the past few years as the Canadian cannabis industry has exploded, mainstream banks have largely avoided making loans in the space, leaving companies to raise money by issuing equity and convertible debt. Deals like the one done by PharmHouse suggest that’s changing, said Chuck Rich, a partner at the Toronto law firm Cassels Brock & Blackwell LLP who acted for PharmHouse and Rivers in the deal.

"What you see now is that at least a couple banks are comfortable, and as soon as you have one or more banks becoming comfortable, the other ones don't have much choice," Mr. Rich told Cannabis Professional.

"CIBC is a little bit of a surprise to me, that they were able to get themselves comfortable so fast. So that's great that they're in. I've already heard from Scotia that they're open to do business, and as soon as they see the right deal, they'll be in it. And I think TD and RBC are going to be right there, just behind," Mr. Rich said.

Lending money to cannabis companies, however, is still a difficult prospect, Mr. Rich said. Because cannabis licenses are non-transferrable, one of the most valuable assets licensed producers own cannot be put up as collateral. Likewise, banks are unlikely to secure loans against inventory: the cannabis itself.

That means banks are more likely to be comfortable working with operators they already know and trust, Mr. Rich said. In the case of Rivers, CIBC co-led the company’s go-public round last summer and BMO has done deals with Rivers’ parent company Canopy Growth Corp.

Having experienced business people from the agriculture side of the PharmHouse joint venture doubtless helped as well. The numbered company that owns 51 per cent of PharmHouse is directed by Paul Mastronardi, a prominent greenhouse executive who leads Mastronardi Produce Ltd., owner of the Sunset Produce brand.

"To the extent that you're looking at cannabis deals in the future that are conversions of existing Ag deals, then the lender that knows that tomato or whatever grower will have some comfort with the individuals involved," Mr. Rich said.

Challenges still remain to debt financing. But Mr. Rich is confident we’ll see more deals like this in the coming months, as cash flow increases for LPs selling into the recreational market, and companies start paying more attention to the dilution that accompanies equity raises.

“There’s only so much capital to go around, and if there’s too much dilution, it won’t do the existing or the original owners any good, they won’t get the value they need out of the end product,” Mr. Rich said.