Cannabis lender Chicago Atlantic had its IPO in December 2021 after four years as a private company. Since then, the company has funded more than $140M in midsize cannabis companies across the US.
Cannabis Wealth hears from co-founder and Chair of Chicago Atlantic, a leading US cannabis business lender about what he looks for in new opportunities, the impact of inflation and interest rates and how federal legalisation might affect lenders.
What does Chicago Atlantic look for in potential new opportunities?
The firm focuses on middle-market state-licensed US cannabis operators with an institutionalized approach to origination and stringent underwriting criteria.
We weigh out a few factors. Our firm will take into consideration the company’s state. Chicago Atlantic typically focuses on limited license states, largely east of the Mississippi River. The team also looks at collateral and cash flow when considering opportunities.
We focus on borrowers’ ability to service our loan. From that perspective, we are open to investing in any company that has cash flow or meaningful assets.
What impact are the interest rate hike and inflation having on cannabis lenders and borrowers?
In general, interest rate hikes are known to affect all industries negatively since the cost of capital increases for both lenders and borrowers possibly even leading to higher rates of default.
Cannabis is unique, however, because it is an industry that is growing at 20 per cent year over year, and demand for capital will remain strong due to lack of competition and borrowers’ appetite for growth. In addition, the lenders that have provided loans based on floating rates will be unaffected vs those who have fixed that are effectively absorbing the cost of higher rates.
Inflation is impacting both lenders and borrowers as costs are rising across the supply chain and the cost of capital is continually increasing.
How can lenders de-risk lending to the cannabis industry?
Lenders can de-risk by focusing on cash flow, proper debt to EBITDA ratios, fix charge coverage ratios and minimum cash requirements. In addition, collateral/asset coverage ratios should remain robust and typically north of 1:2.
Which US states matter most to you right now?
We tend to focus on states with limited license markets that have the opportunity to transition from medical to adult-use markets such as Pennsylvania, Florida, New Jersey and New York. We have not done any deals in California yet, but we would be willing to if it’s with the right operator.
What are some of the biggest opportunities in the cannabis space right now?
In terms of lending, there is a lack of competition and since cannabis is illegal at the federal level, it presents an opportunity for cannabis lenders because banks won’t lend to that space.
How would federal legalisation impact you as a lender?
I don’t consider the prospect of federal legalisation to be a risk for Chicago Atlantic, it would be a positive regulatory shift that would improve the creditworthiness of borrowers. Additionally, the firm would be able to take advantage of a cheaper cost of capital.
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