January 31, 2023 – Zombies have been a popular cultural phenomenon for several decades. Originating in Haitian folklore and spreading through the works of modern writers and filmmakers, the image of a zombie – a reanimated corpse with a hunger for human flesh – has captured the imaginations of millions.
While the lore of zombies has been around for generations, the concept of a “zombie SPAC”, or a blank check company that has been heavily redeemed, is a novel concept.
The boom in blank check issuance from July 2020 to March 2021 resulted in hundreds of SPACs meeting, or now exceeding, their initial deal deadlines (generally 18 to 24 months).
Instead of liquidating when their deadline was reached, many sponsors chose to seek shareholder approval to extend their SPACs, keeping the hope alive of landing a definitive agreement even after their initial term was up.
To extend a blank-check company’s deadline, it must stage a shareholder vote. Concurrently with the vote, a SPAC must offer its investor the option to redeem their shares for the underlying cash in trust (including accrued interest).
As recently as two months ago, as we approached the final month of 2022 and multiple dozens of SPACs sought extension votes before year-end, nearly 100% of blank check companies traded at a discount to NAV.
Source: Accelerate
Of the 508 SPACs outstanding, 128 have gone through at least one redemption cycle. Sometimes, these redemptions can be as high as 99%.
More than 1/4 of the SPAC universe has gone through an extension/redemption cycle, with the average having to give back 82% of its capital raised back to investors.
We define “zombie SPACs” as those that have suffered heavy redemptions and now have less than $40 million of cash in trust.
Once shrunk down to micro-cap levels post-redemption, an odd dynamic sometimes happens to a zombie SPAC. Specifically, their small share floats have increasingly attracted speculators who find their limited market capitalization easily manipulated through the guise of a short squeeze. Basically, zombie SPACs sometimes turn into a micro-cap meme stonk. As the SPACs begin to be controlled by speculators, their volatility skyrockets.
As these securities go from low-volatility SPAC (basically a Treasury bill trading at a discount plus a call option on a good deal) to high-volatility speculation, they typically trade to a price above NAV. Instead of the arbitrage strategy of buying SPACs below NAV, the speculators rely on the greater fool theory to flip their SPACs above NAV at a higher premium to the next meme stonk trader.
These zombie SPACs have wreaked havoc on the asset class’s statistics. Specifically, the equal-weighted average return and yield metrics have been heavily influenced by micro-cap SPACs trading at wild prices (and premiums to NAV).
On average, the SPAC universe trades in line with its net asset value. Of the 23 SPACs with a free float below $10 million, they trade at an average premium to NAV of 1.7% (which swings violently).
These micro-cap zombie SPACs pose several risks to investors:
- Skipping the NAV redemption to hope for a low-float meme stock is speculative and risky
- Zombie SPACs typically do not meet the market capitalization thresholds for the NYSE and NASDAQ exchanges and are delisted, to relist on scarier exchanges such as the OTC
- Micro blank check companies can have minimal liquidity, leaving investors potentially in a bind if they need liquidity sooner than the next redemption/liquidation
Zombies are often considered frightening because they represent a loss of humanity, uncontrolled and unstoppable aggression, and the possibility of a viral or biological disaster wiping out humanity. The idea of being turned into a zombie and losing control of one’s mind and body is also a source of fear for many people. In addition, the fact that zombies are often depicted as being relentless and impossible to permanently defeat adds to their scare factor. Zombie SPACs are not quite as scary to investors. However, they still present several reasons to exercise caution on these struggling blank-check companies.
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.
