Green Thumb Industries ($GTII) picked up $205MM USD in ‘new’ incremental debt – while extinguishing an existing (and more expensive) debt facility. They claim to be lowering existing annual interest cost. Trim right?

As it is, the previous amount – at $105MM USD – was shot out as a note in May of 2019. It was also used at the time to reduce interest costs, presumeably as the company matured and revenue came into focus….it was able to secure interest rates lower than existing debt:

This sort of thing is very ‘normal course’ for business – as times change and risk profiles are mitigated – prudent management *should* seek lower costs for capital, the same way a homeowner might take advantage of a lower interest rate environment to renegotiate their mortgage.

The initial deal went out at 12% for a 3 year term, with an option held by $GTII to increase the aggregate amount of the loan by some 40%. To secure these terms, the lenders either asked for (or were given) some 2MM of free warrants on $GTII’s equity. These came with a strike of $19.39CAD and a tenor of 5 years:

So, how does this all add up? (Yep, this is a chainsaw….not a scalpel):

(Note the relative linearity in cost of warrants. I’ve ignore the accordian feature of the facility…that can get complex, and typically only leaned on by the seller. But, you will see structured finance price these things pretty consistently over time, and in line with perceived underlying risks. What these say to me is that the risk profile of $GTII hasn’t really changed in 2 years from an equity standpoint. The implied vol remains the same. Cashflow has proved out – yes – hence lower interest rates.)

$GTII reduced their effective interest rate on indebtedness by about 4 1/2%, and expanded it by ~=$100MM. Given previous debt/equity ratio was around 25% nominal, and with additions is about ~=32% nominally, I’d place an enhancement of around ~=1.5-2% improvement in cost of capital.

I see $GTII’s cost of capital – with their capital structure ‘as is’ – with attendant optionality – in a range from 19-23%. This incremental debt roll (that’s all it really is), improves that to 17-21%.

The question for the investor is whether or not incremental asset additions from that new $100MM can generate returns exceeding ~=19% RoR. And, what level any contribution margin adds to free cash flow, for, more acquisitions. Heading into Virginia doesn’t fill me with enthusiasm.

But, while I’m not bearish on the space, I’m tentative as to how profitable the sector will ultimately become, or also, how long existing moats may be maintained. Those are both speculative conditions…and despite current optimism for the sector in terms of velocity in profitability….it’s a hard trade for me to pack much risk into a single market participant. Even if they are the best of a relative lot.

All I will ever do is take measured risk, and be content if I either miss a boat, or catch an early one. The MSO space is extremely speculative to myself at this point.

The preceding is the opinion of the author, and is in no way intended to be a recommendation to buy or sell any security or derivative. The author holds no position in $GTII.