Pt. 2: Did Trulieve Breach a Covenant?
Disclaimer: This post is for informational purposes only and does not constitute financial advice; readers should conduct their own research and consult a professional advisor before making investment decisions.
I have received lots of questions and comments following yesterday’s post Did Trulieve Breach a Covenant? One of the more interesting comments is along the lines of: so what? the bonds become current in October, and are callable at par next month. If the company breached a covenant, they can just refinance in the private credit market.
Let’s dive into the implications and potential outcome using some illustrative figures:
IF Trulieve did in fact breach a covenant, the company would have 60 days to cure the default, or, in a scenario where they decide to move on from its high yield capital structure - 60 days to refinance its notes in the private credit market.
Trulieve exited the most recent quarter with $328 MM of unrestricted cash on hand, $710 MM of PP&E and $848 MM of intangible assets. For the fiscal year ended 2024, approximately 96% of intangible asset value came in the form of cannabis licenses, so we will assume the same. $814 MM of cannabis license value. Let’s add this up to get a gross figure:
$710 MM of PP&E + $814 MM of cannabis license value = $1,524 MM of net asset value.
The bonds have a notional value of $365 MM, which is the target use of proceeds for a private credit refinancing.
Now let’s make some rough assumptions around unencumbered value:
There is $115 MM of mortgage debt and $135 MM of secured construction debt = $250 MM secured debt.
Let’s assume both the mortgage debt and construction debt was lent on a 60% LTV basis. The value of the lending-base would be $416 MM, call it $420 MM for round (cannabis) numbers.
Now let’s figure out a rough estimate for the total asset base a creditor would give value to. Assuming $710 MM of PP&E and $814 MM of cannabis license value, I’m going to assume a higher end of the mid-range for NOLV (net orderly liquidation value) of the PP&E assets of 60%, and 30% for the licenses:
$710 MM x 0.6 = $426 MM and $814 MM x 0.2 = $163 MM
Total adjusted asset base = $589 MM
Now I am going to be generous and toggle the NOLV of the PP&E and licenses up to 70% and 30%, respectively. The total re-adjusted asset base is now $741 MM, less the $420 MM assumed encumbered assets provides an unencumbered asset base of $321 MM.
Let’s assume private credit is a bit more flexible, and will provide a slightly higher loan-to-value of 80%. Here is what a refinancing would look like using the above illustrative numbers, and making some BIG assumptions around asset value and encumbrances:
Two points to reiterate: 1) At no point did I think Trulieve could not refinance its bonds; and 2) we have made some large assumptions around asset values.
The ability to refinance existing debt is not in question, but a strong consideration is what does the new debt look like? Features of private credit relative to high yield bonds are typically more punitive:
First lien secured;
Amortizing;
Issue discounts and/or up-front fees;
Prepayment penalties and/or repayment fees;
Financial and maintenance covenants;
Higher, floating rate interest; and
In some cases, equity upside.
We can spend time at a later point talking about the benefits of private credit versus high yield.
The question I raise is this: Should the company have the option, is private credit a good solution for their capital structure? I would argue not.
Moving on, what are the broader implications? Let’s again assume Trulieve breached a covenant and they are forced to refinance in the direct loan market, it is not as material for a company of Trulieve’s size and their ability to access capital markets. But assuming management acknowledges the need to retire the bonds due to the covenant breach, comparable US-based cannabis credit that is not as well capitalized and is trading at a larger discount will likely be more materially impacted. I would make the broad assumption that most indentures and/or credit agreements contain similar language surrounding the borrower’s requirement to pay taxes. This brings us to names like:
If Trulieve breached its covenant, then other levered US cannabis companies with uncertain tax liabilities are in a similar/worse position.
Yours truly,
G.G.