Aurora Offers Early Conversion of $230 Million in Debt at Significantly Reduced Price

Aurora Cannabis (TSX: ACB) (NYSE: ACB) announced this evening that it will be conducting a “temporary amended early conversion privilege” related to $230 million worth of convertible debentures coming due in March 2020. In layman terms, it means that the firm has offered a revised conversion price for the converts that are coming due as a means of reducing the cash provisions required to pay off the debt.

The early conversion offering was a necessary evil for Aurora, given that the debt was to originally convert at a price of $13.05 per share. With the equity closing today’s session at $4.38 on the TSX, the odds of it meeting the conversion price are slim. Given that Aurora currently has $152.5 million in cash, while its payables are stacked high at $163.5 million, the firm essentially has no means of paying the tab for its debt any other way. Thus, it needed to find a way to convince the debtholders to convert.

The result though, is some serious dilution. Whereas the $230 million worth of debt was to originally convert into 17,624,521 shares, the revised offering is much worse. Under the terms for the early conversion privilege, debt will convert at a 6% discount to the 5-day volume weighted average price of the equity at the time of conversion.

Right now, that price is believed to be $4.47. However, it will likely drop between now and the period during which the offer is active, which is November 18 through to November 20.

What this means, is that instead of 17 million shares worth of dilution, there is much more on its way. If all debtholders were to convert today, it would equate to 51,313,910 additional shares being absorbed into the market. The figure takes into account $0.6 million worth of debt that had been previously converted. This number is only likely to climb after the market has time to react to the earnings filed tonight, with the equity currently being down 12% in after hours trading.

The result, is that in order to keep the exact same market capitalization should the full remaining debenture be converted, the equity price of Aurora would have to drop to $4.17 per share. While only a 4.79% decline from the current equity price level, its a decline for all else to remain the same. The resulting share count would be in excess of 1.08 billion.

However, the revised conversion price of the debt is essentially a requirement for Aurora to be able to meet its current obligations. As it currently stands, the firm has managed to obtain support from debtholders that currently hold $155 million worth of the outstanding debentures, which significantly eases the firms debt position. If it can manage to get support from the majority of the remaining debtholders, it will find itself in a much stronger financial position as it heads into the new year.

Aurora Cannabis closed today’s session at $4.38 on the TSX.

Information for this briefing was found via Sedar and Aurora Cannabis. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.