AFC Gamma spills the tea on its troubled borrowers

During the fourth quarter earnings call, AFC Gamma pulled back the curtain on the company’s problem children. AFC Gamma said it was making progress on reducing its exposure to underperforming assets. AFC said it currently has four borrowers on non-accrual, which represents 25% of its portfolio. The increase in unrealized losses on loans helped to contribute to the company’s losses in the fourth quarter.

Two in receivership

New CEO Daniel Neville said, “Two borrowers remain in receivership to optimize operations and maximize value for the benefit of all stakeholders. One of our borrowers, private company A has been actively liquidating assets. It has so far paid down over $53 million in principle to AFC and syndicate partners, of which $4 million of principal pay-down was received during the quarter. As we have discussed during the last several quarters, we are working closely with a subsidiary of private company G, which continues to have cash flow challenges. Last quarter, we mentioned that we modified interest payments for the remainder of 2023 to ensure the borrower had adequate working capital.”

AFC said that it got the $1 million cash interest that was due in October and November. Unfortunately, AFC said that it only got a partial payment for December. To get a reduced interest rate, the parties agreed to a joint plan that requires the borrower to make a significant equity contribution and install top operators in each of Pennsylvania and New Jersey to optimize operations. The company said this would decrease the financial burden of debt service on the borrower in the near term.

Neville said, “We also introduced a significant cash sweep for the remainder of the loan that we anticipate will pay down both current and unpaid interest and begin to amortize the loan through maturity. The New Jersey operations will now be fully managed by Chief Restructuring Officer with significant operating and turnaround experience in the cannabis industry.”

If those two companies weren’t bad enough, AFC told investors that in early January 2024, another private company called L agreed to sell its operations in Missouri. Neville said, “This sale will translate into a $20 million reduction in principal on private company L loans, offset by $10 million in future draws to fund their cultivation build-out in Ohio. On January 3, 2024, the company received the first portion of funds leading to a reduction in principal of $11.4 million.”

Still seeing promise

Even though the company has clearly been affected by the problem children, it hasn’t lost its optimism for the industry. AFC remains committed to the space. Neville even said he plans to originate over $100 million of new deals with strong risk-adjusted returns in 2024. As of March 1, 2024, its active pipeline of cannabis deals is currently $279 million.

The company said it was seeing its pipeline expand, mainly driven by what it called Cannabis 3.0 players. Neville described the entrepreneurs as people who have founded businesses in cannabis or other industries were successful, and are now entering or reentering the cannabis industry. He said that many of these companies are building through a combination of organic growth and opportunistically acquiring distressed assets. “We are excited to finance many of these operators that have clean capital stacks and are unburdened with debt, sale-leasebacks, or legacy tax liabilities,” said Neville.

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