New Coverage: Canopy Growth’s New Term Loan Provides Flexibility, Despite Negative Adjusted EBITDA

Relevant Items:
Covenants Tear Sheet, Debt Document Summaries
Canopy Growth’s Debt Documents

Canopy Growth, a Canadian company, produces, distributes and sells a range of cannabis and hemp-based products for both recreational and medical use under a portfolio of distinct brands in Canada and globally. Its equity trades on the Toronto Stock Exchange and the Nasdaq. Continue reading for our Americas Covenants team's analysis of the Canopy Growth flexibility and Request a Trial for access to the linked debt documents, tear sheets, and summaries as well as our coverage of thousands of other stressed/distressed debt situations.

The company ended its 2021 fiscal year on March 31, 2021, with negative adjusted EBITDA. The earnings press release says that positive adjusted EBITDA can be expected by the second half of FY 2022 because of, among other things, the implementation of supply chain optimization and a stronger balance sheet.

The stronger balance sheet comes from a $750 million term loan agreement (with a $500 million accordion feature) entered into on March 18, 2021, with the proceeds going to working capital and other general corporate purposes. A full summary of the new term loan is available here, with highlights from the credit agreement detailed below.

The company’s capital structure as of March 31, 2021, is shown below for reference:

 

 

• Pricing - The term loans are priced at L+850 bps and subject to a 1% LIBOR floor. If Canopy Growth’s equity fails to remain listed on at least two of the Toronto Stock Exchange, Nasdaq and the NYSE, however, the margin will increase by 100 bps 90 days after such event and an additional 100 bps on each 12-month anniversary of such event until the stock is relisted.


• Call protection - Any refinancing, voluntary prepayment or payment following acceleration is subject to call protection. A make whole amount applies to any such payments prior to March 18, 2023, (the two-year anniversary of the loan). After that, the call protection becomes 5% for the third year, 2.5% for the fourth year and 0% for the fifth year.


• Financial covenant - Liquidity (unrestricted cash and undrawn committed revolving commitments, if any) may not be less than $200 million as of the last day of any fiscal quarter. The company has a 15-business-day grace period to comply with this covenant, during which it can cure the default by adding liquidity. As of March 31, the company was in compliance with this covenant.


• Debt and lien capacity - The company can incur $556 million of secured general debt using a combination of its $500 million incremental/incremental equivalent debt basket and general debt and lien baskets. Nonguarantors can incur an additional $56 million secured by their own assets. A 2x fixed charge coverage ratio unsecured debt basket is not currently available.


• Restricted payments, investments - A general restricted payment basket provides the company with $113 million of general restricted payment capacity. A “cumulative credit” basket based on 50% of consolidated net income starting April 1, 2023, with a $100 million starter amount, can be used for restricted payments only if the company is in compliance with a 2x fixed charge coverage ratio, which it is not. The cumulative credit basket can be used for investments, however, and, combined with baskets for general investments, investments in joint ventures and similar businesses, and investments in unrestricted subsidiaries, it provides the company with at least $656 million of investment capacity. The credit agreement limits investments in unrestricted subsidiaries to the greater of $50 million and 1% of total assets, which is $56 million; the company may not use other capacity for such investments.


• Material IP transfers - Notwithstanding the above, the company may not invest any IP that is material to Canopy Growth and its restricted subsidiaries, taken as a whole, in unrestricted subsidiaries, JVs, equity investees, exempted subsidiaries or nonguarantor restricted subsidiaries.


• Events of default - Events of default include if the common equity of Canopy Growth ceases to be listed on at least one of the Toronto Stock Exchange, Nasdaq and NYSE, and if certain cannabis-related legislation is repealed.

--Alisha Turak