High & Dry: Banking crisis to further choke funding for cannabis sector

Green Thumb Industries

24/03/2023 12:07

By Mrinalika Roy
       March 24 (Reuters) - The global banking turmoil
threatens to squeeze U.S. cannabis companies already struggling
with meager funding sources by drying up support from regional
lenders and tightening fundraising from alternative avenues.
    Most U.S. banks do not service cannabis companies as
marijuana remains federally illegal despite several states
legalizing its medicinal and recreational use and is a Schedule
1 drug. 
    Only about 10% of all U.S. banks and about 5% of all credit
unions provide cannabis banking, as per analysts' estimates. 
    "What this crisis means is probably the duration of the
capital tightness in our space (will continue) because we're
seeing risk-off mentality," said Morgan Paxhia, co-founder of
cannabis hedge fund Poseidon Investment Management.
    "We're expecting banks to become more restrictive with
lending and that's going to have implications." 
    The collapse this month of two U.S. mid-sized lenders -- the
Silicon Valley Bank and Signature Bank  SBNY.O  -- and the Swiss
government-brokered deal for UBS  UBSG.S  to buy Credit Suisse
 CSGN.S  have sparked fears of a contagion and shredded investor
confidence.
    "Given they already have slim pickings when it comes to
raising capital, nervous investors won't help the situation,"
said Rachel Gillette, partner and leader of Holland & Hart's
cannabis practice. 
    Smaller banks, regional lenders and credit unions that
typically extend credit to the cannabis sector have been flagged
by analysts as facing higher risk from the current turbulence. 
    U.S. cannabis borrowers could also see their already higher
interest rates go up further due to the crisis.
    Average interest rate in the cannabis sector can be as high
as 20%, according to True Trading Group, an online community of
traders and entrepreneurs. That compares with the 5% to 5.7%
average rate for business loans from traditional banks, as per
Bankrate, an online publisher of finance content. 
    
    
    WEEDED OUT
    Expensive loans may not be the only challenge for the
sector. Chances of weed companies securing new capital have now
deteriorated, at least four fund managers told Reuters.
    "It's incredibly hard raising capital in cannabis, but we
now think (opportunities to secure new capital) are even lower
as investors are cautious," said Paxhia.
    "Primary investors in cannabis are high net worth
individuals not institutional capital, and those pools of
capital are going into a risk-off mode." 
    Investors had flocked to the sector encouraged by a boom in
demand during the pandemic as well as hopes of passage of the
Secure and Fair Enforcement Banking Act (SAFE), which protects
lenders serving legitimate cannabis-related businesses. 
    However, demand has since eased and the SAFE Act is stuck in
Senate.
    ETF flows into the sector fell to about $404 million last
year, down from about $2.3 billion in 2021, according to ETF
data provider TrackInsight. 
    Investors pulled $34.13 million out of U.S. cannabis
exchange-traded funds since the start of 2023, compared to
inflows of $116 million in the first quarter a year earlier,
according to Refinitiv data.
    
    "It (banking crisis) certainly has shot away a lot of
investors who were just beginning to think about deploying more
capital into the space again," Vince Ning, CEO and co-founder of
Nabis, the largest cannabis wholesale distributor in California.
    "Should the sector deteriorate further, you could see more
predatory financings for smaller operators with no choice," said
Adam Heimann, co-founder and CEO of True Trading Group.
    
    REFORM PAUSE
    Some investors also fear that the crisis will add
uncertainty around the passage of the SAFE Act.
    The U.S. House of Representatives passed it in 2021, but the
Senate is yet to approve the bill.
    On Thursday, Senate Banking Chairman Sherrod Brown said
hearings on SAFE Act has been postponed to focus on the bank
crisis.
    "This crisis, once again, de-prioritizes cannabis reform in
Washington DC," said Paxhia.
    U.S. companies including Curaleaf Holdings Inc  CURA.CD ,
Green Thumb Industries  GTII.CD , Trulieve Cannabis Corp
 TRUL.CD , and Terrascend Corp  TER.CD  either declined to
comment or did not respond to requests for comment.

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Investor interest in cannabis    https://tmsnrt.rs/3FAmQZy
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 (Reporting by Mrinalika Roy in Bengaluru; Editing by Sweta
Singh and Sriraj Kalluvila)
 ((mrinalika.roy@thomsonreuters.com;))