The last few years have been especially challenging for Canopy Growth Corporation (Nasdaq: CGC) (TSX: WEED) and we are closely following the leading Canadian Licensed Producer (LP).

Earlier this week, Fitch Ratings announced that it has downgraded Canopy Growth’s rating to CCC, which is the agency’s fifth-lowest rating. As part of the downgrade, Fitch warned of potential further negative action and we consider the downgrade to be significant.

According to the agency’s ratings scale, a CCC rating means there is substantial credit risk and that there is a real possibility of default. Prior to the downgrade, Fitch rated Canopy Growth as a B- and said the downgrade is related to the following:

Canopy Growth has reported declining market share in Canada’s cannabis industry
The company has been impacted by a series of operational setbacks (i.e. closing facilities and divesting assets)
Canopy Growth has faced challenges as it relates to changing its cultivation strategy

As part of the announcement, the credit-rating agency said it could downgrade Canopy Growth’s rating again if:

The Canadian LP continues to have trouble executing on its premiumization-cultivation strategy
The credit-rating agency said that Constellation Brands (Nasdaq: STZ) has less of a strategic incentive to continue to support Canopy Growth
Fitch believes that if the Canadian LP repays or refinances its $466 million of notes would be classified as a distress debt exchange

On top of the announcement Canopy Growth reported to have settled a trademark dispute with French orange liquor producer Rémy Cointreau, which argued that the Canada-based cannabis producer’s line of “Quatreau” beverages infringed on its trademark.

Yesterday, Canopy Growth entered into exchange agreements with certain holders of 4.25% unsecured convertible senior notes that are due in 2023. As part of the transaction, the Canadian cannabis company acquired approximately C$255.4 million of notes in exchange for common shares and approximately C$3 million of cash for accrued and unpaid interest.

We believe the exchange agreements will be beneficial for Canopy Growth in the near and long-term. Going forward, we will monitor how the agreements lower the amount of capital that Canopy Growth owes note holders and believe the elimination of the debt strengthens the balance sheet.

We continue to have cautiously optimistic outlook on Canopy Growth and will monitor how the market responds to the developments. If you are interested in learning more about the embattled Canadian LP, please send an email to support@technical420.com with the subject “Canopy Growth” to be added to our distribution list.

Authored By

Michael Berger

Michael Berger is Managing Partner of StoneBridge Partners LLC. SBP continues to drive market awareness for leading firms in the cannabis industry throughout the U.S. and abroad.