Fitch Ratings has downgraded the Long-Term Issuer Default Ratings (IDR) for
Subsequently, Fitch has reassessed and upgraded the IDRs to 'CCC-' post completion of the exchange. Fitch has also downgraded the ratings for the senior secured term loan facility at Canopy and the co-issuer, 11065220
The post-exchange IDR of 'CCC-' reflects Canopy's current liquidity position including actions taken to reduce the high cash burn rates and recent asset sales and the uncertain path to profitability due to executional risks around its operating strategies. Fitch could take further negative rating actions if Canopy pursues actions that Fitch considers a distressed debt exchange per its criteria or the liquidity headroom becomes further diminished.
Key Rating Drivers
Agreement Constitutes a DDE: Canopy entered into privately negotiated exchange agreements with certain noteholders that cancels
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 this satisfies both prongs of its test including a material reduction in terms due to the equitization of the notes held by the holders.
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
Since
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
As contemplated, Canopy would not directly own any of the
Parent-Subsidiary Linkage: Fitch's ratings for Canopy do not assume any ratings 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, Fitch equalizes the IDRs.
Derivation Summary
Canopy is 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 its 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, but 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
Capital spending of about 12 million in FY2024 and FY2025;
FCF deficit around
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Good execution with ongoing strategic initiatives that results in greater clarity around a pathway to profitability that generates positive EBITDA, significant reduction in operating deficits and improved liquidity to fund ongoing operations and necessary investments over the next 24 to 36 months.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Canopy enters into a debt restructuring that could be classified as a DDE per Fitch's criteria;
Further reduction in liquidity headroom such that a default appears probable;
Lack of profitability improvement that increases concerns around the sustainability of its capital structure.
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
Ongoing 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
Capital Structure: Canopy's
Recovery Considerations
For issuers with IDRs of 'B+' 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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