Morning Commentary: Cannabis companies eyed in convertibles market; Tilray notes on tap

By Abigail W. Adams

Portland, Me., Oct. 4 – Market players were eyeing what was described as one of the most interesting convertible deals of the year – Tilray Inc.’s $400 million offering of five-year convertible notes.

Valuations of the deal varied drastically based on the assumptions used with the borrow being “the million dollar question,” a source said.

The deal is the second Rule 144A deal from the cannabis industry to be brought to market in 2018 and the first U.S. dollar-denominated deal.

In a Rule 144A and Regulation S deal in June, Canopy Growth Corp. priced an upsized C$500 million of 4.25% convertible notes due 2023.

The notes have skyrocketed alongside stock since pricing. The 4.25% notes closed Wednesday’s session at 150.68 with stock closing the day at C$63.86.

Sources were uncertain if Tilray’s convertible notes would follow a similar course given a recent stock spike. However, the sector is interesting, several sources said.

Tilray eyed

Tilray plans to price $400 million of five-year convertible notes after the market close on Thursday with price talk for a coupon of 4.75% to 5.25% and an initial conversion premium of 12.5% to 17.5%, according to a market source.

Underwriters are marketing the deal with a credit spread of 500 basis points over Libor and a 40% vol., a market source said.

Using those assumptions, the deal models about 5 points cheap, a source said.

However, other sources pegged the credit spread at 800 bps over Libor. With a credit spread of 800 bps over Libor and a 50% vol., the deal modeled about 15 points rich, a source said.

While the company has a market cap of $14 billion, it only generated $2.5 million in revenue in the last quarter, a source said.

The company has limited credit history with its IPO in July.

The stock has surged since its IPO of $17.00 with stock shooting past $300.00 in intraday trading on Sept. 19 – the wild price swings halted trading several times during the session.

Tilray stock closed Wednesday at $156.83 and have trended downward since the launch of the convertible notes. They were down 4% to $150.21 early in Thursday’s session.

While the deal would be attractive to hedge players, especially given the coupon, there is no borrow on the stock, sources said.

The “million dollar question” is what will be done to help facilitate the borrow, a market source said.

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