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April 20, 2020
Welcome to the SPAC Research weekly newsletter.

When Can Issuers Issue Again?

As shelter-in-place orders continue to have an unprecedented impact on the broader economy, the traditional IPO window remains mostly closed. And yet those watching a backlog of 12 SPACs with outstanding registration statements -- and plenty more in the DRS phase -- are all wondering one thing. When will the SPAC window open back up?

Everybody seems to be waiting for Social Capital as the bellwether. Chamath Palihapitiya's second and third SPACs filed their initial S-1's 52 days ago and are stuck in limbo with the rest of the group.

It's not shocking that the market forced Chamath to wait. Those SPACs were set to price the third week of March, right as the coronavirus selloff put everyone in full panic mode. But what now?

The median SPAC common share traded down to a yield of approximately 6.5% at the nadir in March. Prices have recovered fairly quickly since then, but participants have not forgotten how it felt when there was no bid for anything just a couple weeks ago. And SPAC investors aren't exactly clamoring for new paper the way they were back in February.

We spoke to plenty of funds trying to raise capital to deploy into SPACs at attractive yields at the end of March. But part of the selloff was a deleveraging event from participants who were previously trying to earn a spread between SPAC returns and their own cost of capital. And the possibility of another 10% decline in common equity prices if the market were to revisit March lows is enough to prevent many folks from turning the leverage back up to buy common in the open market.

One way to think about new SPAC issuance is with a simple equation:
Back in February, when generic SPAC common equity with two years remaining in its life was trading at around $9.80, this meant issuers could skate by with 25 cents worth of warrant coverage included in IPO units and still produce a unit that would trade at or above $10 on day one. And premium issuers whose common stock was going to trade materially above $9.80 on day one ended up with IPOs that were massively oversubscribed.

But SPAC common equity hasn't fully recovered from March's liquidity-driven selloff. The median SPAC is trading at approximately a 2.4% estimated yield right now. Part of that may be the relative desirability of a fixed income substitute with equity upside (vs. actual risk assets at current prices). Part of it is also the fact that executing a successful deSPAC looks more challenging now than it did a couple months ago -- so that equity upside may be a bit further away than it used to be.

If you assume 6-month Treasury rates remain at approximately 20 basis points, the terminal trust value on a $200mm SPAC is about $10.02. That means newly issued generic SPAC common is worth about $9.56 if you expect it to yield 2.4%.
At $9.56 common, 24-month issuers need to include 44 cents of warrant coverage to balance the $10 unit equation. SPAC warrants traded down across the board last month, so 44 cents requires more warrant coverage than it used to.

So when can we expect IPO issuance to pick up again? Some of it will depend on how much issuers are willing to adjust their terms. It's also likely that this is a moment where a team's resume and SPAC experience will be an even greater differentiator than before.

It seems pretty clear that the "1/4 Warrant" moment for units is in the past. As for the next wave of IPO's, we're watching implied yields and warrant prices very closely. The broader market and SPAC securities remain volatile, which means you may not simply be able to assume the last trade represents an accurate proxy as a market clearing price for an entire $200mm book.

But if SPACs trade on average to a 2.0% estimated yield (on $10.02 terminal trust value), a SPAC share with two years remaining will be worth $9.63. That's a fairly reasonable baseline to build a book on top of, especially if the market's going to pay up for your conversion option -- which likely means Social Capital is pretty close to ready to price its IPO.

News From the Past Week

IPOs and S-1's
  • CC Neuberger Principal Holdings I (PCPL) amended its registration to include 1/3 instead of 1/4 warrant coverage in each unit. Chinh Chu's private investment firm, CC Capital, and one of Neuberger Berman's funds also announced a backstop facility making up to $600mm available for co-investment with a series of SPACs cosponsored by Chu and Neuberger Berman.
Charter Extensions
  • Graf Industrial Corp. (GRAF) managed to hold on to almost half its trust account despite not offering any trust account contribution in connection with its extension through 7/31/2020. GRAF is negotiating a deal with an as-yet unnamed polypropylene recycling company, but if you do a Google search for the target's business description you'll find a company called PureCycle Technologies, which uses the same verbiage of a "ground-breaking patented recycling process," developed and licensed by Procter & Gamble.
  • Tottenham Acquisition I Limited (TOTA) will reconvene its extension meeting on Thursday 4/23/2020. If the extension is approved, sponsors can deposit $0.10 per share to the trust account to effect each of two 3-month extension periods.

Liquidation
Links
  • IPO Edge hosted a webinar last week with Stifel, ICR, and a handful of SPAC sponsors discussing SPACs in the current environment and a number of other timely panel topics.
Disclosures: Site administrators are long GRAF/W, TOTAR, TOTAW and may trade in or out of positions in these or other SPAC securities at any time. Information from spacresearch.com is provided for informational purposes only and should not be relied upon as the basis for any investment decision. Nothing on spacresearch.com is a recommendation or solicitation to buy or sell any investment.