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DBRS not high on pot credit rating

By The IJ Staff | October 24 2018 11:30AM

Cannabis may be getting a high rating among Canadian consumers looking for recreational pot, but credit-rating agency DBRS isn’t ready to give the sector a high rating just yet.

In a report, DBRS says it believes that the largest Licenced Producers (LPs) in the cannabis sector exhibit characteristics consistent with the low, non-investment-grade range of the credit ratings spectrum — in the B range.

This follows the legalization of cannabis in Canada for recreational use, which took place Oct. 17.

Although a whole new value chain will develop with the legalization of recreational cannabis, DBRS’s commentary focuses on the LPs that produce and sell cannabis to government warehouses, which then ultimately supply retailers and consumers.

Vying for Canadian wholesale market

DBRS believes the LPs will be vying for a Canadian wholesale market for cannabis that forecasts to be $4 billion to $6 billion annually. But it says for now, cannabis is still a relatively small-scale sub-sector within the context of the consumer products industry and the economy in general. Much is to be determined regarding consumer reception, competitive behaviour, regulation, taxation and international market potential.

At the outset, DBRS believes that the largest LPs in the cannabis sector exhibit characteristics consistent with the low, non-investment-grade range of the credit ratings spectrum — in the B range.

“These characteristics could eventually be associated with BB-range and even BBB-range ratings for innovative consumer companies with strong brands, good geographic and product diversification and scale.”

In order to be considered investment grade, LPs would likely have to expand internationally, said DBRS, which intends to monitor the cannabis market as it unfolds.

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