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Новости/Аналитика

How in the US they make money in a falling hemp market

05.03.2020

Medical cannabis prices in the United States have declined by an average of about 16% since the start of the year. The crisis of overproduction is felt and the future of most companies specializing in the cultivation and processing of plants with therapeutic properties is not as rosy as it is shown in regularly published press releases. There is a decline in the medical cannabis market in the United States, which will last at least until the end of 2020, which implies a significant number of bankruptcies, and the presence on the market of companies seeking investment capital. That is why American companies specializing in the production of medical hemp turn to innovative ways to solve their problems with cash flow, and representatives of investment banking seek to help them in this.

A significant number of investors, including investment banks that were previously not related to hemp business, are actively looking for companies with legal means for legal cultivation and processing of hemp that have therapeutic properties in order to inject financial resources into them and thereby provide the support they need. And this is not about charity. Investors are given the opportunity to get a financial stake in the company, restructure it and put the business on the path to recovery - all this in order to profit from investments. 

Investors' interest in hemp companies with certain financial problems suggests an alternative form of financing when the more traditional forms of providing the enterprise with a financial resource have dried up (state support, private investment or venture capital resources). Such negotiated investors are included in limited funds companies with the aim of further restructuring in order to avoid the sale of distressed, but extremely promising assets.

Drop in the wholesale cost of medical cannabis in 2018

According to a partner at Altitude Investment Management, a New York-based company (engaged in shares of companies producing medical hemp), “At the moment, a significant number of companies legally producing medical hemp are in distress, as their income does not regularly correspond to their expenses, which leads to further increase in debt. Investment bankers, having carefully assessed the possibilities of participating in the share capital of such companies, can purchase securities with lower returns where the cost of the securities is provided by the assets of the acquired company. ”

Due to the fact that state capital is currently unavailable, and private investors are increasingly unwilling to take over the assets of troubled companies, the attention of investment banks is drawn to debt restructuring, as some fairly liquid companies suffer from high capital costs and lack of income.  

“Many companies, especially private ones, remain well-managed and relatively solvent, but they are prone to debt problems that often cause difficulties with cash flows,” says the director and founder of the California investment group Linnaea Holdings. The structure headed by him plans to invest in cannabis production companies in order to obtain a controlling stake in the future. “There are worthy companies that find themselves in an overly adjusted recession in the market. They are faced with other enterprises that are close to being insolvent, but have shown financial discretion and are now in good shape. However, just like problem companies in the market, it is difficult for sustainable hemp companies to raise working capital. ” 

“Despite the fact that this kind of industry correction is inevitable and painful for many, it has a flip side,” says the general director of the New York-based Gordian Group (an independent investment bank specializing in resolving problematic financial situations). “In a falling market, there are always precedents for the destruction of business and the loss of capital. In this turmoil, a flashy need for financial restructuring regularly arises. ”

Employees of the Los Angeles-based Houlihan Lokey (a large bank of mergers, acquisitions and restructuring) are carefully examining the industry in the current investment climate. According to them, while large multidisciplinary hemp business operators may have enough influence to provide large amounts of debt in order to finance their obligations and further expansion - such as, for example, Cresco Labs and Curaleaf, others less liquid companies are faced with the need to sell assets or participate in financial debt restructuring operations. For example, MedMen, headquartered in California, offered to pay its suppliers not in cash, but in shares, while Green Growth Brands from Ohio said it was planning to sell its business due to cash shortages and excessive costs. Therefore, the search for such companies, which on the one hand have investment attractiveness, but have problems finding financial resources necessary for operating activities, is a priority for Houlihan Lokey specialists.

Commentary by the Ukrainian Technical Hemp Association

Medical cannabis prices in the United States have declined by an average of about 16% since the start of the year. The crisis of overproduction is felt and the future of most companies specializing in the cultivation and processing of plants with therapeutic properties is not as rosy as it is shown in regularly published press releases. There is a decline in the medical cannabis market in the United States, which will last at least until the end of 2020, which implies a significant number of bankruptcies, and the presence on the market of companies seeking investment capital. That is why American companies specializing in the production of medical hemp turn to innovative ways to solve their problems with cash flow, and representatives of investment banking seek to help them in this.

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