Redfund Capital Corp. (CSE:LOAN) (OTC:PNNRF) announced the opening of one of Canada’s first medical cannabis merchant banks in Vancouver, British Columbia.
Redfund is a medical cannabis incubator and accelerator that provides debt and equity funding. The merchant bank will offer cannabis companies with a much-needed alternative source of capital by offering bridge loans and helping companies build their valuations. Their goal is to help cannabis companies grow without prematurely diluting equity, while also assisting with mergers and acquisitions and IPOs.
While the U.S. cannabis industry still has difficulties obtaining bank accounts or loans due to cannabis’ Schedule I status as a drug, the Canadian banking industry is much more accommodating, notably after Canada legalized cannabis for recreational use, beginning on October 17. Canadian cannabis businesses benefit from a more relaxed banking system. Large banks like Canaccord Genuity (TSX:CF) quietly dominate the Canadian cannabis market.
Startup groups like Redfund Capital seek out niche portfolios. Redfund CEO Meris Kott said in a statement: “The first focus of our merchant bank will be the financing of medical cannabis, CBD, and hemp companies. Our initial portfolio companies will be announced in the next week, and we believe their strong business fundamentals and upside potential will bring immediate value to our shareholders.”
Financing wasn’t always easy for Canadian cannabis companies. Canada first approved medical cannabis nearly two decades ago, in 2001, and bank financing has been a nearly 20-year headache for those early companies that entered the market. Like in the U.S., these Canadian companies have long lacked access to the most basic banking services, mainly because recreational cannabis remained illegal in Canada.
Banks were leery of loaning money to the cannabis industry, fearing they would attract criminal activity into the banking business, or draw the ire (and monetary penalties) of the Canadian government.
Since cannabis companies weren’t earning nearly enough with medical sales to create a positive cash flow to fund any significant business expansion, they were stuck. Instead, many cannabis businesses resorted to bought-deal offerings involving the sale of common stock or stock options to raise capital.
Bought-deal offerings have indeed proved successful in raising capital, but outstanding share counts have skyrocketed, much to the chagrin of very diluted investors. Many companies have used tactics of options or warrants that prolong the dilution effect even longer—until 2022 in some examples.
When Canada passed the Cannabis Act, new doors opened for cannabis businesses. Banks can now freely offer services without fear of reprisal or any criminal or financial penalty from the government. It also means that businesses have options other than bought-deal offerings; those are indeed still on the table, but the offerings are no longer the only game in town.
Redfund and Canaccord have been patiently waiting for that day to come, and now that it has arrived, they’re banking on the industry in a big way. Larger banks are too, like the Canadian Imperial Bank of Commerce and the Bank of Montreal. In less than two years, the Canadian marijuana industry is expected to surpass $6.5 billion in value, so it’s no wonder that Canadian banks are entering the market in a big way.
Companies like Canaccord and Redfund are smaller and leaner than the biggest banks and typically can take on more risk. As the Canadian push for cannabis legalization plays out, these publicly traded banks were at first cautious, prudently protecting their investors as they watched the cannabis market evolve from primarily a black market to a legitimate, legally regulated booming business sector.
Bigger banks have the advantage of making more prominent deals, like the one between Aurora Cannabis (NASDAQOTH:ACBFF) and the Bank of Montreal (NYSE:BMO). The two agreed to a CAD$200 million (US$150.3 million) debt facility. Bank of Montreal provided Aurora with a CAD$50 million line of credit and CAD$150 million term loan, at an interest rate hovering around 5 percent.
The Aurora deal represents the largest traditional debt facility to date in the Canadian cannabis industry. Aurora will use the funds to build their extensive portfolio and further establish themselves across the globe as a pre-eminent cannabis company.