Why Aurora’s Debenture Conversion Is a Big Deal


Nov. 20 2019, Updated 2:09 p.m. ET

Last week, Aurora Cannabis (ACB) announced an early conversion privilege for debenture holders with a due date of March 9, 2020. The company allotted the period of November 18 to November 20 as the time for debenture holders to convert their holdings to stocks. The conversion ratio will be a 6% discount from the five-day volume-weighted average trading price.

On November 19, the company announced that shareholders representing approximately 216 million Canadian dollars had agreed to convert their holdings. This amount represented 94% of the total 230 million Canadian dollars’ worth of debentures that will be due on March 9. Aurora’s management will announce the amended early conversion price after the market closes on November 22.

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Debenture conversion to lower Aurora’s debt

The cannabis sector is in a growth phase. Companies need considerable capital to fund their expansion plans. It therefore makes sense that these companies’ debt levels are on the high side. Let’s look at Aurora’s debt levels compared to its peers’.

For the quarter that ended on September 30, Aurora had total debt of 795.7 million. The company’s total debt translates to a debt-to-equity ratio of 17.8%, higher than its peers’. In the comparable quarter, Canopy Growth (WEED) (CGC) and Cronos Group (CRON) had debt of 604.5 million Canadian dollars and 8.2 million Canadian dollars, respectively. Canopy Growth’s debt-to-equity ratio stands at 11.3%, while Cronos Group’s is just 0.4%. Aphria’s (APHA) debt-to-equity ratio is higher at 27.4%.

With its issuance of early debenture conversion, Aurora is looking at lowering its debt to reduce its interest burden. However, the debenture conversion will lead to dilution, lowering its EPS. This development could be a burden on its existing shareholders.

Jefferies’ Owen Bennett is skeptical about Aurora’s early conversion offer. As reported by MarketWatch, he believes the initiative could dent investors’ sentiment more. He added, “With possible cash pressures evident, announcing ceased construction at facilities despite a press release just 6 weeks ago praising progression, and now EBITDA (and cash) positive looking unlikely this year, it would be fair for investors not to believe them.”

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Stock performance

Since the announcement of its early debenture conversion, Aurora stock has lost 29% of its value. Its weak fiscal 2020 first-quarter performance and its management’s decision to scale down its expansion plans have also caused its stock to fall. In the first quarter, the company’s gross margins and net profits were higher than analysts’ estimates. However, its revenue and adjusted EBITDA fell short of analysts’ expectations. For more info, read Aurora Cannabis: Good or Bad News for Its Q1 Earnings?

So far, this year, Aurora Cannabis has underperformed its peers. This year, its stock has fallen 54.1%. Meanwhile, peers Canopy, Aphria, and Cronos have fallen 44.5%, 27.6%, and 38.2%, respectively. Last week, both Canopy and Cronos reported lower-than-expected earnings. You can read more about their performances in Canopy Growth Stock Falls after Weak Q2 Earnings and Cronos Group Stock Rose despite Missing Estimates. For more updates on cannabis, check out 420 Investor Daily.


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