Aurora Cannabis Inc. (TSE: ACB) has announced today that it has entered into a new $200 million debt facility with BMO (Canada’s 4th largest bank).

The company also has the option to upsize the loan to $250 million. The debt facility will be primarily secured by Aurora’s production facilities (Aurora Sky, Aurora Mountain, and Aurora Vie).

This issuance represents the first Canadian Tier 1 bank to provide a sizable loan to the fledgling marijuana industry. Other Canadian banks will undoubtedly follow suit as they seek new avenues of income in the face of a decelerating Canadian housing mortgage market.

Aurora Cannabis expects the effective interest rate to be in the mid to high 4% per annum range over the term of the loans. Pricing is set at a margin over BMO Prime Rate.

Grizzle would view the lending terms as very attractive given the infancy of the industry. Canopy Growth was able to issue $500 million of convertible debt at a rate of 4.25% and a conversion price that was 25% out of the money.

 

Debt a Game Changer for the Marijuana Industry

Thus far the Canadian marijuana industry has grown on the back of equity capital raises, which by definition are dilutive to existing shareholders over the near-term. Shareholders benefit when management teams deploy that equity in activities that achieve a shareholder return greater than the cost of capital it took to raise those funds.

Debt, however, is double-edged sword. Marijuana companies are able to expand capacity without near-term dilution, which is a direct benefit to existing shareholders.

In the press release Glen Ibbott, CFO of Aurora stated:

The shift to traditional debt financing is significant. Our cost of capital continues to decrease, providing us a distinct competitive advantage as we execute on our growth strategy. The non-dilutive nature and attractive pricing are consistent with Aurora’s commitment to generating shareholder value.

Debt financing adds the burden of debt service (making the interest payments), which is certainly amplified for the marijuana sector. Nearly all companies have negative operating income today and there’s significant unknowns around the future profitability of their end recreational markets upon legalization in Canada.

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