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January 25, 2021
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Post-Combination Warrant Values
Where will my warrants trade post-business combination?

Anybody who has owned SPAC warrants before deal closing is familiar with the exercise of trying to figure out what they will be worth post-combination. A SPAC warrant isn't just a simple option and you can't just plug it into a Black-Scholes calculator. Aside from the challenge of guessing at an implied vol number for a stock with limited trading history, SPAC warrants typically employ an $18 redemption threshold above which the company can force holders to exercise early.

In the absence of a reliable formula, we wanted to visualize the entire data set. We plotted every closed SPAC deal from 2020 below. Each data point is the closing print when a SPAC newco and its warrants both traded on the same day.
Data: SPAC Research as of 12/31/2020
Let's start by zooming in on the left side of the chart.
When we looked at this phenomenon one year ago, it was extremely rare for SPACs to trade above $18. For the sake of clarity, we used to break the data set up into low-redemption SPACs (those that held onto more than 50% of their trust account) and high-redemption SPACs (those that didn't). But these days it seems like everything that hangs onto most of its trust account trades well above cash in trust.

Unfortunately, that still leaves us with a surprisingly wide variation in results. There are SPACs with moderate levels of public redemptions that rode the SPAC halo effect this year and coasted at times into the low teens. But many of those had relatively high warrant coverage and the sheer supply of public warrants kept prices modest. Meanwhile there are SPACs in places with high implied volatility like electric vehicles and biotech where speculative demand kept warrant prices high even if the common wasn't trading well.

Float dynamics are always a factor and sponsors that start out with less warrant coverage retain an advantage in realized trading prices because of the limited number of warrants outstanding.
Today's SPAC market also seems to feature an endless supply of electric vehicle and gaming deals that trade to at least a $20 handle. What happens with warrants in those cases?

You might expect any warrant whose underlying is materially above $18 to trade for intrinsic value (plus a small time premium to reflect the remaining time before that warrant can be redeemed by the issuer). Unfortunately there are still numerous complications.

You can see there's a set of data points on the chart (highlighted below) that do actually appear to trade for intrinsic value. What's so special about this group?
This is the set of warrants that is actually exercisable. Much of this newsletter's audience will already be aware that SPAC warrants aren't exercisable for cash unless 1) a registration statement covering the issuance of shares underlying the warrants has been declared effective and 2) at least 30 days have passed since the SPAC's deal closed and at least one year has passed since the SPAC's IPO.

Once exercisable, a SPAC can call its warrants for redemption and force early cash exercise if its stock closes above a certain threshold price (usually $18) for 20 of any 30 consecutive trading days. Usually a SPAC will call its warrants for redemption once this happens, so there aren't all that many data points along the "exercisable" line where the underlying is over $18 and the warrants trade for $11.50 less than that.

But in the past six months we've seen at least a dozen former SPACs rip higher shortly after deal closing and before warrants were eligible for cash exercise. Let's zoom out on the warrant chart and highlight those data points below.
Data points from QuantumScape (NYSE: QS) with underlying prices >$75 omitted for visibility.
It's an important subset. Tens of millions of warrants have traded with high price tags this year, often with unsuspecting would-be arbitrageurs looking to capture the spread between warrant price and intrinsic value. There's no magic formula that dictates what warrants will be worth in such a scenario, which is why it's useful to have a visible history of precedent values.

Why isn't there a formula to value these warrants?

For these warrants to achieve predictable value, they have to become exercisable for cash. But there's no way to estimate when that will happen. In theory, the registration statement that's required to register warrant shares contains much of the same information as the registration statement on form S-4 that was likely approved by the SEC in connection with a SPAC's deal closing. But even under the best of circumstances (and assuming a SPAC files such an S-1 quickly after closing), it takes a few weeks for the first round of SEC comments to come back.

Meanwhile, many participants trying to capture the difference between warrant price and intrinsic value are likely trying to delta-hedge their position. And for SPACs that shoot up quickly into the $20-$30 range, the float is often limited and borrow is expensive. It can be challenging to game out a trade where you could be paying greater than a 100% annualized borrow cost to short the common (expressed either via locate fees or option premiums) -- especially when you don't know how long the situation will last.

The situation is further complicated by the risk of cashless exercise. Those who have been around SPACs for a while likely remember the Virgin Galactic deal, which closed in October 2019. The company filed an initial registration statement covering the shares underlying the warrants, but it was never declared effective. And then in March 2020, the company called its warrants for redemption, requiring cashless exercise of its warrants.

What is cashless exercise? It's when the company delivers you a number of shares in exchange for your warrants based on a "fair market" trailing 10-day closing price or VWAP calculation. Determining the proper delta-hedging formula for such a moving target is well beyond the scope of this newsletter but suffice to say it can be a challenging exercise, especially in a high borrow-cost world.

We are not lawyers, but the "best efforts" registration that SPACs promise to employ for warrant shares has always seemed a bit vague to us. But it seems reasonable that issuers may ultimately decide that cashless exercise is more advantageous for their balance sheet and capital structure than regular cash exercise. That outcome can be adverse for those expecting cash exercise (while still representing a great outcome for many pre-deal warrantholders).
The bottom line is that warrants are more art than science. They're a less expensive way to gain upside exposure to SPAC common, but their performance is hardly deterministic, for a variety of reasons.

And while the market may not be as liquid, market makers have given investors plenty of listed options to choose from on SPACs and former SPACs. It's worth monitoring options markets in addition to warrants, as they can provide another angle into the exposure desired from a given SPAC security.


News From the Past Week

New S-1's
  • Compute Health Acquisition Corp. (CPUH)
    • IPO: $750mm
    • Focus: Computation and healthcare
    • Warrant Coverage: 1/4
    • Tenor: 24 months
    • Anchor Investor: Medtronic plc ($15mm)
    • Book-runners: Goldman Sachs
  • Gores Holdings VII Inc. (GSEV)
  • Altimar Acquisition Corp. II (ATMR)
    • IPO: $300mm
    • Affiliates: HPS Investment Partners
    • Focus: TMT, healthcare, financial services, fintech and consumer
    • Warrant Coverage: 1/4
    • Tenor: 24 months
    • History: Altimar Acquisition Corp. -- deal announced with Owl Rock Capital Group and Dyal Capital Partners; Trine Acquisition Corp. -- now Desktop Metal (NYSE:DM)
    • Book-runners: Goldman Sachs, JP Morgan
  • Fusion Acquisition Corp. II (FSNB)
    • IPO: $300mm
    • Focus: Fintech or wealth/asset management
    • Warrant Coverage: 1/3
    • Tenor: 24 months
    • History: Fusion Acquisition Corp. -- seeking target
    • Book-runners: Cantor Fitzgerald
  • HH&L Acquisition Co. (HHLA)
    • IPO: $300mm
    • Focus: Healthcare or healthcare-related companies in Asian markets with a focus on the Greater China market
    • Warrant Coverage: 1/2
    • Tenor: 24 months
    • Book-runners: Goldman Sachs, Credit Suisse
  • JOFF Fintech Acquisition Corp. (JOFF)
    • IPO: $300mm
    • Focus: Fintech
    • Warrant Coverage: 1/3
    • Tenor: 24 months
    • Book-runners: RBC
  • ScION Tech Growth II (SCOB)
    • IPO: $300mm
    • Affiliates: ION Investment Group Limited
    • Focus: Fintech
    • Warrant Coverage: 1/3
    • Tenor: 24 months
    • History: ScION Tech Growth I -- seeking target
    • FPA: OrION Capital Structure Solutions UK ($300mm)
    • Book-runners: Citi
  • GigCapital4, Inc. (GIGU)
    • IPO: $260mm
    • Affiliates: GigCapital Global
    • Focus: TMT
    • Warrant Coverage:1/3
    • Tenor: 24 months
    • History: GigCapital, Inc. -- now Kaleyra Inc. (AMEX: KLR); GigCapital2, Inc. -- announced business combination with UpHealth and CloudBreak Health; GigCapital3, Inc. -- announced business combination with Lightning eMotors
    • Book-runners: Oppenheimer, Nomura
  • Fifth Wall Acquisition Corp. I (FWAA)
    • IPO: $250mm
    • Affiliates: Fifth Wall Asset Management
    • Focus: Technology business focusing on verticals of the real estate industry
    • Warrant Coverage: 1/3
    • Tenor: 24 months
    • Book-runners: Goldman Sachs, Deutsche Bank
  • G Squared Ascend I Inc. (GSQD)
    • IPO: $250mm
    • Affiliates: G Squared Equity Management
    • Focus: Software-as-a-Service, Online Marketplaces, Mobility 2.0/Logistics, Fintech/Insurtech, New Age Media and Sustainability
    • Warrant Coverage: 1/3
    • Tenor: 24 months
    • FPA: Sponsor affiliate ($100mm)
    • Book-runners: UBS
  • Power & Digital Infrastructure Acquisition Corp. (XPDI)
    • IPO: $250mm
    • Focus: Renewable and transition energy in North America
    • Warrant Coverage: 1/2
    • Tenor: 24 months
    • Book-runners: Barclays, BofA
  • Goal Acquisitions Corp. (PUCK)
    • IPO: $225mm
    • Focus: Sports
    • Warrant Coverage: whole warrant
    • Tenor: 24 months
    • Anchor Investor: Atalaya Capital Management ($22.5mm)
    • Book-runners: EarlyBirdCapital
  • VPC Impact Acquisition Holdings II (VIH)
    • IPO: $225mm
    • Affiliates: Victory Park Capital Advisors
    • Focus: Fintech
    • Warrant Coverage: 1/4
    • Tenor: 24 months
    • History: VPC Impact Acquisition Holdings -- deal announced with Bakkt; L&F Acquisition -- seeking target
    • Book-runners: Jefferies, Citi
  • FTAC Athena Acquisition Corp.
  • Crescent Cove Acquisition Corp. (COVA)
    • IPO: $200mm
    • Affiliates: Crescent Cove Advisors
    • Focus: TMT verticals in Southeast Asia
    • Warrant Coverage: 1/2
    • Tenor: 24 months
    • Book-runners: Cantor Fitzgerald
  • Crown PropTech Acquisitions (CPTK)
    • IPO: $200mm
    • Focus: Businesses that provide technological innovation to the broader real estate ecosystem
    • Warrant Coverage: 1/3
    • Tenor: 24 months
    • Book-runners: RBC
  • Itiquira Acquisition Corp. (ITQR)
    • IPO: $200mm
    • Focus: Technology, healthcare, pharma, education and consumer services in Brazil
    • Warrant Coverage: 1/2
    • Tenor: 24 months
    • Anchor Investor: SPX Equities Gestão de Recursos Ltda. ($20mm)
    • Book-runners: Citi, UBS
  • Isos Acquisition Corp. (ISOS)
    • IPO: $200mm
    • Focus: Digital media and entertainment
    • Warrant Coverage: 1/3
    • Tenor: 24 months
    • FPA: Apollo Global Management ($75mm)
    • Book-runners: JP Morgan, LionTree
  • Kensington Capital Acquisition Corp. II (KCAC)
    • IPO: $200mm
    • Focus: North America automotive and automotive-related
    • Warrant Coverage: 1/4
    • Tenor: 24 months
    • History: Kensington Capital Acquisition Corp. - now QuantumScape (NYSE: QS)
    • Book-runners: UBS, Stifel Nicolaus
  • Leo Holdings III Corp
    • IPO: $200mm
    • Affiliates: Lion Capital
    • Focus: Consumer
    • Warrant Coverage: 1/4
    • Tenor: 24 months
    • History: Leo Holdings Corp. -- now Digital Media Solutions (NYSE:DMS); Leo Holdings Corp. II -- seeking target
    • Book-runners: Deutsche Bank
  • Priveterra Acquisition Corp. (PMGM)
    • IPO: $200mm
    • Focus: Medical technology
    • Warrant Coverage: 1/3
    • Tenor: 24 months
    • History: none
    • Book-runners: Wells Fargo, Guggenheim
  • Twin Ridge Capital Acquisition Corp. (TRCA)
    • IPO: $200mm
    • Affiliates: Twin Ridge Capital Management, HPS Investment Partners
    • Focus: Consumer or distribution
    • Warrant Coverage: 1/3
    • Tenor: 24 months
    • Book-runners: Barclays, Evercore
  • Isleworth Healthcare Acquisition Corp.
    • IPO: $150mm
    • Focus: Healthcare
    • Warrant Coverage: 1/2
    • Tenor: 18 months
    • Book-runners: I-Bankers
  • Quantum FinTech Acquisition Corp (QFTA)
    • IPO: $150mm
    • Focus: Technological services to the financial services industry
    • Warrant Coverage: whole warrant
    • Tenor: 18 months, plus 6 months with an LOI or agreement
    • Book-runners: Chardan
  • Evo Acquisition Corp. (EVOJ)
    • IPO: $100mm
    • Focus: Technology and financial
    • Warrant Coverage: 1/2
    • Tenor: 24 months
    • Book-runners: B. Riley, SMBC

Deal News

  • Climate Change Crisis Real Impact I Acquisition Corporation (CLII) announced a deal to acquire electric vehicle public fast charging network EVgo. The deal reflects an enterprise value of $2.1bn and includes a $400mm PIPE. The transaction is expected to close in Q2 2021.

  • Acamar Partners Acquisition Corp. (ACAM) closed the company's acquisition of CarLotz Thursday 1/21/2021 with less than 1% of public shares exercising redemption rights.

  • Oaktree Acquisition Corp. (OAC) closed its acquisition of Hims on Wednesday 1/20/2021. Ordinary shares and warrants are now trading on the NYSE as “HIMS” and “HIMS/W.”

  • Gores Holdings IV, Inc. (GHIV) closed its acquisition of United Wholesale Mortgage on Thursday 1/21/2022 with less than 1% of shareholders exercising redemption rights. Ordinary shares and warrants are now trading on the NYSE as “UWMC.”

  • GigCapital2, Inc. (GIX) secured $285mm in equity and convertible financing commitments in connection with its previously announced business combinations with UpHealth Holdings, Inc. and Cloudbreak Health, LLC.

  • Bloomberg reported that FTAC Olympus Acquisition Corp. (FTOC) is in talks to acquire online payments specialist Payoneer, Inc.
  • Reuters reported that electric passenger aircraft developer Joby Aero Inc. is exploring a SPAC deal at a valuation of approximately $5bn.
IPO

  • Liberty Media Acquisition Corporation (LMAC) raised $500mm for an acquisition in media, digital media, music, entertainment, communications, telecommunications and technology. Units contain one-fifth warrant coverage.

  • Gores Metropoulos II, Inc. (GMII) raised $400mm for an acquisition in consumer products and services. Units contain one-fifth warrant coverage.

  • Primavera Capital Acquisition Corporation (PV) raised $360mm for an acquisition of a global consumer company with a significant China presence or compelling China potential. Units contain one-half warrant coverage.

  • North Atlantic Acquisition Corporation (NAAC) raised $330mm for an acquisition in consumer, industrials and telecommunication in North America and Europe. Units contain one-third warrant coverage.

  • Jack Creek Investment Corp. (JCIC) raised $300mm for an acquisition in food and consumer products. Units contain one-third warrant coverage.

  • One Equity Partners Open Water I Corp. (OEPW) raised $300mm for an acquisition in technology, healthcare, and specialty industrials. Units contain one-third warrant coverage.

  • Queen’s Gambit Growth Capital (GMBT) raised $300mm in an upsized IPO for an acquisition in clean energy, healthcare, fintech, industrials, mobility and emerging technology. Units contain one-third warrant coverage.

  • TZP Strategies Acquisition Corp. (TZPS) raised $288mm for an acquisition in technology services, business services and consumer products and services. Units contain one-third warrant coverage.

  • Legato Merger Corp. (LEGO) raised $205mm for an acquisition in the renewables, infrastructure, energy, construction and industrial sectors. Units contain whole warrant coverage.

  • Oyster Enterprises Acquisition Corp. (OSTR) raised $200mm for an acquisition in media, technology, consumer products, industrials, real estate, real estate services, financial services, hospitality and entertainment. Units contain one-half warrant coverage.

  • SCP & CO Healthcare Acquisition Company (SHAC) raised $200mm for an acquisition in healthcare. Units contain one-half warrant coverage.

  • Virtuoso Acquisition Corp. (VOSO) raised $200mm in an upsized IPO for an acquisition in media companies within the digital marketing, digital platforms, subscription, and ad tech sectors. Units contain one-half warrant coverage.

  • European Sustainable Growth Acquisition Corp. (EUSG) raised $125mm for an acquisition in renewable energy, food/agri-tech, water conservation, energy storage, recycling, ed-tech/online learning, fintech and data/cloud in Europe. Units contain one-half warrant coverage.

  • FoxWayne Enterprises Acquisition Corp. (FOXW) raised $58mm for an acquisition in biotech or telemedicine in North America, with a focus on life sciences and pharmaceutical services. Units contain whole warrant coverage.


Upcoming Meetings and Deadlines
  • 1/27/2021 ANDA Charter extension meeting (liquidate date 1/31/2021)
  • 1/29/2021 NOVS AppHarvest approval meeting
  • 2/2/2021 AMCI Advent Technologies approval meeting
  • 2/3/2021 FSDC Gemini Therapeutics approval meeting
  • 2/5/2021 AGBA Charter extension meeting (liquidation date 2/16/2021)
Disclosures: Site administrators may maintain positions in various SPAC securities and may trade in or out of those securities at any time without notice. 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.