When a company wishes to restructure its debt and equity mix to better position itself for long-term success, it may consider issuing a debt-for-equity swap. In the case of a debt-for-equity swap, all specified shareholders are entitled to exchange their shares for a predetermined amount of debt in the same company. Bonds are usually the type of debt offered. This is exactly the plan recently integrated by Canopy Growth, a big-name Canadian cannabis producer.
According to the latest updates, the firm has taken the decision to swap shares for $198 million of its debt. To do so, it has reached an agreement with noteholders to exchange that monetary amount of debt for stock and cash. As a result, it will be able to reduce a significant portion of its convertible debt, which is scheduled to mature in 2023.
The limited number of noteholders which includes parent company Constellation Brands completed a deal for Canopy to have the ability to acquire the outstanding 4.25% senior unsecured convertible notes due to mature in exchange for common stock and approximately $2.32 million in cash. This would mean that Constellation would own more of Canopy and other shareholders less.
“By addressing a substantial portion of our soon-to-mature convertible debt, we are deleveraging our balance sheet, preserving capital, and reducing interest payments by over C$10.9M annually,” Canopy Chief Financial Officer Judy Hong said in a statement. “These actions are critical as we navigate broader economic headwinds and will enable us to continue investing in the highest potential areas of our business to drive future growth.”
A company can swap shares for debt to avoid paying coupons and the face value of the debt in the future. Instead of having to pay a large amount of cash for debt payments, the company offers equity to debt holders. This is one good reason why Canopy has taken such action.