What's going on here?
What does this mean?
Tilray’s new bonds will be “convertible” – like normal bonds, but with the added potential to turn into shares in the company (if the stock performs well and reaches a predefined level). Investors like them because they get the benefits of being a loaner of money and an investor – i.e. regular interest payments and (potentially) shares. Convertible bonds are good for companies, too, as they typically get to pay less interest than on regular bonds and other debt. But, for existing shareholders, this isn’t great news – new equity would “dilute” the value of their shares, as each share would be worth less (there’d be more shares but no change in company value).
Tilray shareholders have had a rough few days, with the company raising more money so soon after “going public” (when it got a bunch of cash) in July (tweet this). Between that and PepsiCo saying no to an investment in the company, its shares got lit and burnt down.
Why should I care?
For markets: Convertible bond buyers beware.
Convertible bonds do give investors lots of benefits – but approach with caution. If the company doesn’t perform as well as hoped (and its stock doesn’t reach that predefined level), there’s the risk that all that cash invested only earns investors interest payments – lower than those of regular bonds – probably not ideal when investing $400 million.
The bigger picture: Weed is expensive.
Tilray isn’t the only cannabis company borrowing money to grow its business. In June, Canopy issued $460 million of convertible debt, and Aurora sold unsecured debt to help its purchase of CanniMed. Unsecured debt is some of the riskiest around for investors as, if the company fails to make repayments, they’re are left in the wind (as opposed to debt secured against the company’s assets, like property or machinery).