Institutions are using this hybrid security to get into the best cannabis companies, but this is just an early sign of the massive interest to follow.
A wave of capital is surging towards cannabis stocks.
Because of the legal uncertainty surrounding the market and lingering taboos around marijuana, larger institutional investors like mutual funds and investment banks have been slow to move their tremendous assets into the cannabis sector.
But this reluctance is quickly giving way to greed as bankers, sell-side analysts, and portfolio managers can no longer afford to ignore an industry set to snowball to $100 billion in just the U.S. alone.
Lately, we’ve seen a massive uptick in deals that have all the signs of major institutional interest.
And today, we’re going to break down exactly what that means for the cannabis sector, and your investment dollars, in 2019…
A Major Uptick in “Hybrid Securities”
Over the past few months, there has been a flurry of deals with instruments called convertible notes.
Like stocks and bonds, convertible notes are another way that a company can raise the funds it needs to grow. In fact, these instruments are a hybrid, being both part stock and part bond.
They work like a bond because a company borrows money from investors, with set maturities ranging from a couple of years up to usually five before they have to pay it back. Also like a bond, the notes set an interest rate, and the company has to make regular payments on the debt.
But embedded in the note is an ability to receive stock rather than cash to pay off the debt, which makes it part stock as well. The terms of the deal set the stock price above the point at which the debt converts to stock. If it’s a good deal, that price will be higher than the current stock price.
This higher price means that current investors don’t have to worry about the issuance of more stock unless the stock price rises – usually significantly – which is how the recent large issuance from Aurora Cannabis Inc. (NYSE: ACB) was structured.
Let’s take a closer look at the deal…
A Crash Course on Aurora’s Convertible Note Offering
Just last month, Aurora raised $345 million through a convertible note offering. The company has five years to pay off the note, and the interest rate is 5.5%.
For every $1,000 of debt a noteholder owns, Aurora can settle the debt by issuing them 138.37 shares of stock (there are other terms, but we’ll keep it simple for now).
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Exchanging roughly 138 shares for every $1,000 in debt means it makes sense to convert the stock above $7.23 per share. If the stock goes above that price, the stock is worth more than the $1,000 in debt, so noteholders would prefer to receive the stock.
The conversion price of $7.23 per share is nearly 17% higher than the stock price the day before Aurora announced closing the deal on January 24, so, if the noteholders converted to stock, current stockholders enjoyed a rally to get there.
More importantly, deals of this size mean institutional investors, including far more U.S. based ones, are starting to take a big interest in providing capital to cannabis stocks. And with interest rates of only 5.5%, they no longer view the investments as risky compared to the returns they expect to receive on the stock.
Institutional Gates Are Opening
Other recent convertible note offerings included $15.2 million raised by California-based gummies maker Plus Products Inc. (CSE: PLUS), $7.6 million by California grower Sunniva Inc. (CSE: SNN, OTC: SNNVF), and a $48.3 million raise by still privately held Greenlane, which makes cannabis consumption accessories.
These convertible debt offerings are just an early sign of the ultimate massive interest from big money investors. Before long, they will be followed by enormous IPOs on major U.S. exchanges once the States Act passes. Once that happens, the floodgates holding back capital will burst wide open as this will normalize banking and investment underwriting for U.S. based cannabis companies.
This institutional interest benefits anyone already in cannabis stocks, especially investors like members of our Cannabis Investor’s Report. They already own those cannabis companies best positioned to attract that institutional money and are well ahead of this wave of investment.
When it comes, it will surge cannabis stocks to levels far higher than anyone has ever seen.
Thanks for being an integral part of the National Institute for Cannabis Investors,
Executive Director, National Institute for Cannabis Investors
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February 04 2019