Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDR) for
Fitch has also downgraded the senior secured term loan facility for both entities to 'RD' from 'CCC+/RR2'.
The downgrade reflects the agreements with secured and unsecured lenders. Subsequently, Fitch has reassessed and upgraded the IDRs to 'CCC-' and the senior secured term loan facility to 'CCC+/RR2' post completion of the exchange and has simultaneously withdrawn all of the ratings.
Canopy's 'CCC-' IDR reflects its current liquidity position including actions taken to reduce the high cash burn rates, the exchange/redemption agreements that have reduced debt, recent announced asset sales and the uncertain path to profitability due to executional risks around its strategies and the challenges within the operating environment.
Fitch has withdrawn Canopy's ratings because the ratings have been taken private.
Key Rating Drivers
Agreements Constitute a DDE: Canopy entered into privately negotiated redemption agreements with certain noteholders that repaid
When considering whether the transaction should be classified as a DDE, Fitch expects both of the following to apply: the transaction imposes a material reduction in terms compared with the original contractual terms; and it is conducted to avoid bankruptcy, similar insolvency or intervention proceedings, or a traditional payment default. Fitch believes the agreements with secured and unsecured lenders satisfies both prongs of its test.
Constrained Liquidity: Canopy's cash and short-term investments were
While Canopy is expected to reduce operating FCF deficits given announced cost reduction initiatives, including several measures to reduce the cash burn related to brand building and operational plans around BioSteel, operating deficits could remain material in FY2024 at around
Asset Sale Divestitures: Since
Canopy continues to assess additional strategic options to supplement liquidity and reduce cash operating deficits. Canopy's financial statements for year-end FY2023 contain a statement by its auditors expressing uncertainty regarding the ability to continue as a going concern.
Canadian Operations Challenged: Given the ongoing structural issues within the Canadian cannabis marketplace, challenges with operating strategies and uncertain path to profitability, Canopy announced further restructurings in
Cost initiatives including actions announced in
Canopy has filed a revised proxy statement as the previous CUSA structure was not in compliance with NASDAQ's listing rules. Presently, little clarity exists around Canopy's timeline to move forward with this organizational structure, including the successful completion of the proxy review and timing for the shareholder vote.
As contemplated, Canopy would not directly own any of the
Parent-Subsidiary Linkage: Canopy's ratings do not assume any support from the strategic linkage between Constellation and the company. In connection with the proposed transactions announced by Canopy in
As part of this conversion, all commercial agreements between Canopy and Constellation would be terminated, Constellation will no longer have board rights or approval rights over certain transactions, and any restrictive covenants previously agreed upon between the parties will terminate. Across Canopy's corporate structure between the parent and subsidiary, Fitch equalizes the IDRs.
Derivation Summary
Canopy was rated lower than
Legends' 'B-'/Stable rating reflects its modest scale, high adjusted leverage in the 7x area and minimal FCF. The rating is supported by the company's strong liquidity and unique position as a fully integrated provider of hospitality services for professional and college sports teams, live entertainment venues, and attractions. While the pandemic substantially disrupted the company's operations, new business has driven strong growth in revenues, which significantly exceed pre-pandemic levels.
EBITDA margins remain depressed due to high inflation and the lower-margin nature of contracts Legends has recently entered into; however, Fitch expects continued margin recovery and new contract wins will support EBITDA growth over the longer term.
GPS Hospitality's 'CCC+' rating reflects Fitch's view of a stabilization in sales and improved operating performance following an extended period of sales decline and margin contraction, driven by wage and commodity inflation, notably at the primary brand Burger King. The improvement in earnings is supported by increased core capabilities through new kitchen equipment, outdoor digital menus, new menu offerings, as well as enhanced recruiting platforms that have helped alleviate staffing challenges. The rating is constrained by the company's small scale with expected revenues and EBITDA of
Key Assumptions
Revenue declining in the low single digits in FY2024, assuming Canadian cannabis quarterly run rate of around
EBITDA deficit in the mid-to-upper
Cash interest costs in the low
Capital spending of about 12 million in FY2024 and FY2025;
FCF deficit around
RATING SENSITIVITIES
Rating sensitivities are no longer relevant given Fitch's ratings withdrawal.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
On-going Cash Burn, Weakening Liquidity: The ongoing cash burn combined with market conditions have eroded Canopy's liquidity position and hamper its ability to access additional capital. Cash, cash equivalents and unrestricted short-term investments totaled
To supplement liquidity during 2023, Canopy entered into an agreement during
In
Recent Agreement Constitutes a DDE: On
Capital Structure: Canopy's
In
Recovery Considerations
For issuers with 'B+' IDRs and below, Fitch performs a recovery analysis for each class of obligations. Issue ratings are derived from the IDR and the relevant Recovery Rating (RR) and notching based on expected recoveries in a distressed scenario. Fitch takes the higher of liquidation value or enterprise value (EV, based multiple applied to the stressed EBITDA) to determine the waterfall recoveries.
The 5.0x for Canopy considers historical bankruptcy exit multiples for CPG companies ranging from 4.0x to 10.0x, with a median reorganization multiple of 6.3x. The multiple for Canopy also considers Canopy's brands. Fitch considers the value accorded to the agreements to purchase interests for Wana, Jetty Extracts, and
In deriving a liquidation value of the assets, Fitch considered the liquidation value of inventory, receivables, and net property, plant and equipment and applied various advance rates. Fitch also considered liquidation values for Storz & Bickel, BioSteel, and thisworks, and valuations for
The initial
Issuer Profile
Canopy is a leading global diversified cannabis and hemp company based in
Summary of Financial Adjustments
Fitch adjusted the fair value of debt to reflect debt amount payable on maturity, stock-based compensation, transactions expenses, impairments and restructuring costs.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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