BLACKROCK Municipal Income TRUST V.BFK.P

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BlackRock Municipal Income Trust (the Fund) is a diversified closed-end management investment company. The Fund's investment objective is to provide current income exempt from federal income taxes. Under normal market conditions, the Fund invests at least 80% of its managed assets in investments the income from which is exempt from federal income tax (except that the interest may be subject to the alternative minimum tax). The Fund may invest directly in securities or synthetically through the use of derivatives. The Fund's investment policies provide that it invests at least 80% of its total assets in investment grade quality municipal obligations issued by or on behalf of states, territories and possessions of the United States and their political subdivisions, agencies or instrumentalities, each of which pays interest that, in the opinion of bond counsel to the issuer, is excludable from gross income for federal income tax purposes. Its investment adviser is BlackRock Advisors, LLC.

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BLACKROCK Municipal Income TRUST > HEXO CREDIT FACILITY - BEWARE AND KNOW THE FACTS

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Comment by YesSetForLifeon Oct 11, 2021 8:36pm

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Post# 33995929

RE:HEXO CREDIT FACILITY - BEWARE AND KNOW THE FACTS

Quietinvestor wrote:
HEXO AND ITS CREDIT QUALITY - READ

Hexo closes successful capital raise, so why is its stock falling?

Last week, Canadian cannabis grower Hexo Corp. (TSX: HEXO; Nasdaq: HEXO) closed its underwritten public offering of 49.0 million units at $2.95 per unit for gross proceeds of $144.8 million.

Each unit included one common share and one-half share of warrants with a $3.45 exercise price (17% premium) and five-year life.

Viridian Capital Advisors values the warrants at approximately 31 cents per unit, producing a net share price of $2.64, a 23.25% discount to the preannouncement price.

Then, on Aug. 30, Hexo shareholders overwhelmingly approved the Redecan acquisition in which Hexo will pay $400 million in cash and issue 69.7 million shares for the cannabis producer.

The cash payment will be funded by combining last week’s equity issue and the proceeds of a previously sold $360 million senior convertible notes issue.

Since the announcement of the equity transaction, Hexo’s stock has fallen about 30%.

As shown in the graph below, Hexo is down more than 60% since the Redecan deal was announced May 28, significantly worse than the 20% decline of the index of large Canadian licensed producers (which includes Aurora Cannabis, Canopy Growth, Cronos Group, Organigram, Sundial, Tilray and Village Farms International).

Why is Hexo down so much?

Investors were surprised by the size of the equity issue. After all, Hexo’s recently raised convertible debt should have paid the bulk of the $400 million required for Redecan. Hexo also said the proceeds would be used for “expenditures in relation to the company’s U.S. expansion plans,” which conjures images of dead capital to Viridian’s analysts.

The Canadian market increasingly resembles a competitive dogfight between desperate, aimless and cash flow-negative competitors, many of which lack observable paths toward profitability. It has become increasingly clear that Hexo can justify its valuation only through substantial revenue increases, which are unlikely without access to the American THC market – a development we believe is years in the future. Furthermore, Viridian is not convinced that Redecan could successfully compete against the likes of Sublime in the U.S. pre-roll market even if they were allowed.

Investors are still rightfully concerned about Hexo’s ability to integrate the acquisitions it has made (including 48North, Redecan and Zenabis) without any significant hiccups.

Perhaps most importantly, Viridian’s analysts have become more concerned about Hexo’s long-term viability.

The converts from the $360 million note mature in two years, and those will either convert at a relatively low price of $3.75 per share or need to be refinanced with a more dilutive equity issuance – if the market will buy Hexo stock at that point.

Hexo has an unbroken 15-quarter streak of negative cash flow from operations, and, unlike other cannabis firms, Hexo has no sugar daddy to keep it afloat.

The Viridian Credit Tracker model uses 11 financial and market variables to measure liquidity, leverage, profitability and size. The model synthesizes these factors to arrive at an overall credit ranking within a peer group.

Viridian now ranks Hexo as having the worst credit quality of all Canadian licensed producers with more than a $200 million market cap, narrowly edging out Aurora for the bottom position.