Aurora Cannabis Inc. (TSX:ACB) debt facility with the Bank of Montreal is the largest traditional debt facility in the cannabis industry thus far
SmallCapPower | June 28, 2018: Aurora Cannabis Inc. (TSX:ACB) (OTCQB:ACBFF) (Frankfurt:21P) announced on Tuesday, in a significant development, that it has agreed to a new $200 million debt facility, with a potential to increase it to $250 million, with the Bank of Montreal (BMO). The financing deal is non-dilutive and is the largest traditional debt facility in the cannabis industry thus far. And, with one of Canada’s Big 5 Banks willing to lend a cannabis producer up to a quarter of a billion dollars, it shows how far cannabis has come in achieving mainstream acceptance in Canada.
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Consisting of a $150 million term loan and a $50 million revolving credit facility, the debt facility will be secured by Aurora’s production facilities (Aurora Sky, Aurora Mountain, and Aurora Vie) and will mature in 2021. Aurora Cannabis may seek an additional $45 million post the implementation of recreational legalization in October 2018. BMO will also provide $5 million in other credit instruments. The loans can be repaid without penalty at Aurora’s discretion and carry an Interest in the mid to high 4% per annum.
Large cannabis producers continue to invest in significant capacity expansion to capture a slice of the growing recreational opportunity in Canada, expected on October 17, 2018. Most of the capital raises for these expansions, including the recent $100 million from Aphria and $500 million from Canopy Growth, have been through share/convertible issuances, which result in dilution for shareholders. Aurora’s current traditional debt facility is the largest in the cannabis space and sets the stage for many more such facilities from other cannabis producers. This debt agreement should come as welcome news for Aurora Cannabis investors, as the Company has had significant equity dilution over the past few years, reaching 280 million shares in 2017, and now current outstanding shares stand at a whopping 565 million, which includes the 63 million issued in March 2018 for the completion of CanniMed acquisition.
Traditional debt facilities, though, have their own disadvantages including the payment of interest at fixed intervals and penalties for late payments, as well as penalties for loan defaults including seizing of assets. With much uncertainty still hanging over the cannabis space in regard to demand and pricing, it is an added risk for Aurora Cannabis and its investors.
Aurora Cannabis is currently operating at a loss, which could widen based on an incremental interest payment of ~$9.0 million annually (4.5% on $200 million) on top of other expenses.
Following the news release, shares of Aurora Cannabis declined 2.9% to close at $9.41 Tuesday on the TSX.
Aurora is one of the world’s largest cannabis producers, with fully-funded capacity of ~430,000 kgs per year. Aurora Cannabis currently trades at a market cap of $5.3 billion, or 126.7x its TTM sales of $41.98 million.
Disclosure: Neither the author nor his family own shares in the company mentioned above.
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