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: