August 31, 2022 – Despite a flattish SPAC market and sentiment remaining relatively poor given overhanging macro uncertainty, the blank check market continues to drive forward with a steady stream of deal flow.
If you listen to the mainstream business media, you will likely believe that SPACs are dead. However, the market is showing signs of life, with 683 SPACs outstanding and 573 searching for a deal.
This month, 17 SPAC business combinations were announced, representing a total deal value of $9.4 billion, up from just 11 mergers announced in July representing a combined $8 billion enterprise value. In addition, the current SPAC merger activity is up from 12 announced in August of 2021.
The new issuance market has begun to scratch and claw itself out of the lowest of lows. In July, there were zero SPAC IPOs! Four SPAC IPOs raising an aggregate of $312 million this month are up from none in July, although down -94% year-over-year. As the meme goes, “it ain’t much but it’s honest work.”
The market has had a 180-degree turn over the past 18 months. It went from anybody with a pulse can launch a SPAC to only top-tier sponsors can close a quality deal and likely do so with large redemptions. In addition to high SPAC redemptions, there has been a significant increase in liquidations, either caused by the inability to strike a deal or the result of a merger termination.
For example, there have been 17 SPAC liquidations year-to-date, compared to just one last year, while 42 SPAC business combinations have been terminated.
When a SPAC liquidates, it pays the stockholders the underlying net asset value in trust, including accrued interest. As long as the stockholder buys below NAV, they will be fine and generate a positive return. Fundamentally, a liquidation is no different than a redemption. However, in the case of a liquidation, the SPAC warrant becomes worthless.
In an environment of elevated blank check liquidations, the average SPAC warrant price has declined precipitously.
Source: Accelerate
SPAC warrants are in a deep bear market, or perhaps depression, down -80% year-to-date.
Given that an arbitrageur is granted these warrants for free as part of the units issued upon the SPAC IPO, speculators who have acquired these warrants in the market have been decimated.
Currently, the average SPAC warrant trades at just $0.15. Assuming that the average deSPAC warrant is worth $1.00*, the market believes that the typical SPAC has an 85% odds of liquidation**.
While SPAC liquidations are expected to be relatively high (17 year-to-date thus far), the market’s assumption (based on warrant prices) of well over 500 liquidations seems extreme.
In any event, for those holding SPAC units (including warrants), a recovery of warrant values presents additional upside, along with trust accrual, NAV discount accretion and upside optionality.
For SPAC arbitrageurs, that means there are plenty of ways to win.
*Black-Scholes assumptions: deSPAC price = $5.00, exercise price = $11.50, term = 5 years, risk-free rate = 3%, volatility = 45%)
** Odds of liquidation = 1 – (current SPAC warrant price / (assumed successful deSPAC warrant price + liquidated SPAC warrant price)) = 1 – ($0.15 / ($1.00 + $0.00)) = 85%
The Accelerate AlphaRank SPAC Monitor details various metrics on the current opportunity set while offering details on every individual SPAC currently outstanding. The Accelerate AlphaRank SPAC Effective Yield tracks the average arbitrage yield offered. The Accelerate AlphaRank SPAC Index tracks the price return of the SPAC universe.
* AlphaRank is exclusively produced by Accelerate Financial Technologies Inc. (“Accelerate”). The Accelerate Arbitrage Fund may hold a number of securities discussed in this research. Visit AccelerateShares.com for more information.
