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July 13, 2020
Welcome to the SPAC Research weekly newsletter.

Warrant Coverage and Negative Yields
Last Monday, Therapeutics Acquisition Corp. (TXAC) filed an amendment to its S-1 dropping the warrant coverage included in its IPO units from 1/3 all the way down to zero. Then on Wednesday, TXAC became the first SPAC IPO ever to price with $10.00 in trust and no warrants. Even more remarkably, the opening auction cleared at $11.25 and shares traded up above $20 later in the week.

We've heard that the book was almost entirely composed of fundamental investors and that SPAC arb funds received no allocation in the upsized $136mm IPO. It's quite an accomplishment for Jefferies, TXAC's book-runner, which also helped deliver a return of upwards of 40% to any investor who's still holding shares and warrants from the bank's last healthcare SPAC IPO - ARYA Sciences Acquisition Corp.

We've watched warrant coverage drift lower recently -- five 2020 IPOs have priced with 1/4 warrant and the lion's share of IPO proceeds this year have come from SPACs with less than 1/2 warrant coverage. You can see on the chart below that the average warrant coverage for the last ten SPAC IPOs is at an all-time low of 0.36.
Part of the decreasing warrant coverage is a reflection of increased demand for the SPAC product. For years, trust accounts were mostly funded by SPAC arb funds, but 2020 has seen a spate of deals that have traded extremely well. The result has been a surge in interest for SPACs from fundamental investors. And while the amount of issuance has increased this year, demand has increased more than supply.

Deal announcements and LOIs are seeing a more positive reception than ever, and so it makes sense that traders have started paying higher prices for SPACs without an announced business combination. But the movement we've seen in the past six weeks has been staggering.

The chart below plots the estimated SPAC yield curve, showing time remaining against estimated YTM for all SPACs without an announced deal.
If you've been following the SPAC yield curve for a while, this chart should look completely alien. Historically, over 90% of SPACs without an announced deal have provided buyers a positive yield. Now, the median SPAC is yielding -1.3%! Plenty of SPACs are yielding -3% or worse, and buyers of SPAC common equity in the open market are taking principal risk for the first time ever.

We've been writing about retail participation in SPACs for over a month now. It's impossible to distill the exact impact retail is having, but you can't ignore the fact that SPAC deals are being received more enthusiastically than ever before. Almost every pending deal right now is trading at a premium to cash in trust.

We looked last month at how shares are trading up on LOI announcements, in many cases without even the name or enterprise value of the SPAC's intended target company. Of course there's no guarantee an LOI will turn into a definitive agreement, and it can take months to hammer out the finer points of a deal. But buyers of some shares on LOI news have ultimately been rewarded with well-received transactions and share price increases on deal announcement. That has driven prices higher and yields negative, especially for SPACs with the shortest amount of time remaining, as speculators have bought shares in anticipation of news as a positive catalyst for stock price.

Meanwhile, plenty of experienced sponsors with a recent successful deal under their belt are also trading at large negative yields. It's a conundrum for the SPAC arb players who are used to funding the majority of SPAC trust accounts at IPO. Whatever your cost of capital is, you need to earn a guaranteed spread on top of that if you hope to apply leverage to a portfolio of SPAC investments. Traditional SPAC investors would like to see increased warrant coverage given the drop to near-zero in T-bill rates. But instead, we're seeing SPACs being priced like equities rather than bonds with a call option attached. Which is great for sponsors and targets, since fundamental investors are more likely than SPAC arbs to take a given deal seriously enough to stick around past its closing date.

Here's another visualization of the price of SPAC common equity - the trading discount to trust value for all SPACs that are pre-deal announcement.
Historical versions of this chart have shown most SPACs clustered around a clearly defined trendline at some discount to current trust value. Even just a month ago, only a handful of SPACs were trading at a meaningful premium to trust. But now there are far too many to highlight.

Of course, price is a function of supply and demand. And this week, Bill Ackman's new SPAC, Pershing Square Tontine Holdings (PSTH) is set to raise $3bn in the largest SPAC IPO ever. We've never seen that much paper hit the market at once, and it's fair to wonder if the IPO will have an impact on the market in general. If recent price appreciation is any clue, demand for the product remains incredibly strong.

And what about new SPAC issuance? Will we see more and larger warrantless SPACs in the future?

It might be easier to fill a $120mm healthcare book with fundamental investors than a $500mm generalist book. But if the market stays this strong, at some point issuers will try to capture more of the consumer surplus from an IPO that immediately trades to $10.50 or higher. We'll have to wait and see if the rolling average warrant coverage keeps trending lower as the next crop of IPOs comes to market.
SPAC Alpha
Our new platform SPAC Alpha released a report this week on the Graf Industrial acquisition of Velodyne Lidar. See below.

News From the Past Week

IPOs and S-1's
  • Therapeutics Acquisition Corp. (TXAC) raised $135.7mm in an upsized IPO for an acquisition in biotechnology. TXAC became the first SPAC ever to sell shares with no warrant coverage and exactly $10.00 in trust. TXAC is led by Peter Kolchinsky, who has served as a portfolio manager and managing partner of RA Capital Management, a multi-stage investment manager in healthcare and life sciences, since September 2004. Jefferies is sole book-runner.
  • Ace Convergence Acquisition Corp. (ACEV) filed to raise $200mm for an acquisition in IT infrastructure software or semiconductors. The company is led by Behrooz Abdi, the former CEO of InvenSense, an on-chip sensor system provider for consumer electronic devices that was acquired by TDK Corporation, a Japanese multinational electronics firm, for $1.3bn in 2017. Cantor Fitzgerald is sole book-runner.
  • NewHold Investment Corp. (NHIC) filed to raise $150mm for an acquisition in industrial technology. NHIC is led by Kevin Charlton, co-founder of River Hollow Partners, a lower mid-market private equity firm. Charlton was President and COO of Hennessy Capital Acquisition Corp., a $115 million NASDAQ-listed SPAC that merged with Blue Bird Corporation (NASDAQ: BLBD), a school bus manufacturer, in February 2015. Mr. Charlton was also president and COO of Hennessy Acquisition II (HCAC), which raised $200mm in July 2015 and acquired Daseke Inc. (NASDAQ: DSKE) in February 2017. He held the same positions for Hennessy Capital Acquisition III (HCAC), which raised $262.5mm in June 2016 and acquired NRC Group (formerly NYSE: NRCG) in October 2018. Stifel is sole book-runner.
  • Vistas Media Acquisition Company Inc. (VMAC) filed to raise $100mm for an acquisition in media and entertainment. VMAC is led by F. Jacob Cherian, who co-founded I-AM Capital Acquisition, which raised $53mm in August 2017 and acquired SMAAASH Entertainment (NASDAQ: WINR) in December 2018. I-Bankers is sole book-runner.
Deal Announcements, LOIs and Rumors
  • Churchill Capital Corp. III (CCXX) announced a deal on Sunday evening to acquire MultiPlan, Inc., a tech-enabled provider of end-to-end healthcare cost management solutions. The deal carries an initial enterprise value of approximately $11bn, or 12.9x estimated 2021 Adjusted EBITDA. CCXX has secured commitments for a $1.3bn common stock PIPE at $10 and $1.3bn of 6% interest convertible debt with a $13 conversion price. Churchill and MultiPlan will hold a conference call today, 7/13/2020, at 8am ET.
  • Orisun Acquisition Corp. (ORSN) announced a deal to acquire Ucommune Group Holdings Limited which, according to the company's press release, is the largest agile office space manager and co-working community operator in China. The combined company will have an anticipated enterprise value of approximately $765mm at closing or 2.58x 2022 net revenue.

  • Reuters reported that Spartan Energy Acquisition Corp. (SPAQ) is rumored to be in talks to merge with electric car maker Fisker. SPAQ is said to be leading a SPAC bidding war for Fisker, and could announce a nearly $2 billion deal as early as this week. SPAQ closed at $18.20 on Friday, up 62.1% from Wednesday’s close prior to the Fisker rumor.


Charter Extensions

  • BRPA set an extension meeting date of 7/23/2020 with a $0.02 per share monthly contribution. However, if BRPA’s VWAP equals or exceeds $11.00 for a 10-day trading period, it will not have to make the contribution for the following month.
  • SPAQ filed for an extension through 2/14/2021 with no sponsor contribution.
  • ANDA set an extension meeting date of 7/29/2020.
  • GRAF set an extension meeting date of 7/23/2020.

Upcoming Meetings and Deadlines
  • 7/14/2020 LHC Digital Media Solutions approval meeting
  • 7/23/2020 BRPA Charter extension meeting (liquidation deadline 7/23/2020)
  • 7/23/2020 GRAF Charter extension meeting (liquidation deadline 7/31/2020)
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