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August 17, 2020
Welcome to the SPAC Research weekly newsletter.

Implied Yields and Front End Issuance
It was a busy week for those of us digging into the minutiae of SPAC trust account balances, with almost all of the 144 active SPACs filing their quarterly reports for the period ended 6/30/2020.

We frequently get subscriber questions about the historical yield on SPAC common equity. Unfortunately, we don't have any historical data (though we've now started tracking the median yield from our estimated YTM tool). But our analysis below shows the implied yield on SPAC common equity since the beginning of 2019.


We took the amount of cash in trust at each quarterly endpoint, netted out any taxes payable, and compared that to the last trade of each SPAC’s common equity. Then we annualized that discount or premium. (For instance, a SPAC trading at $9.90 with $10.00 in trust and one year remaining would have a 1.0% annualized discount to trust, while a SPAC trading at $9.61 with $10.00 in trust and two years remaining would have a 2.0% annualized discount to trust).

Then we added the 6-month Treasury rate to the annualized discount. The result is the implied yield on SPAC common equity at the end of each quarter back to the beginning of 2019.
You can use the implied yield to get a sense of how cheap or expensive the market is pricing SPAC common equity at a given time. Higher yields mean the market is less optimistic on potential SPAC deals and participants need to get paid more to own the zero coupon bond portion of a SPAC's ultimate redemption value. Lower yields mean the market is more optimistic and is willing to pay closer to (or above) cash in trust for the option to own the company a SPAC's sponsor eventually brings to market.

The chart above likely confirms what participants have noticed in active trading. Coming out of the market selloff in Q4 2018, SPACs were weak and yields were high, with the median implied yield at almost 6%. The SPAC market was strong and rallied through 2019, before pulling back to new lows and higher yields in March of this year. Then SPACs went into hyperdrive as exciting business combinations and a broader market recovery drove newfound interest in the product.


The chart doesn't quite capture the mania we saw in July -- we noted on 7/13/2020 that the median SPAC was yielding -1.3%! But it does generally track the SPAC Research Warrant Index, our other measure of how expensive SPAC securities are.
You can see sentiment has cooled a bit since peaking in late July. Trading activity in common stock reflects that as well, with a number of new IPOs breaking issue and trading below $10 on day one. Plenty of SPAC common shares have traded back into meaningfully positive yields -- though many others are firmly negative, as you can see below (and as compared to this chart from a month ago).
Record demand for SPACs precipitated an unprecedented surge of new S-1 filings in July. One might expect that the pullback in stock and warrant prices would propagate through to new issuance as well. But the IPO pipeline continues to set records, and an all-time high 27 SPACs are seeking to raise almost $8bn right now.
Meanwhile, the 10-deal rolling average of warrant coverage has moved to an all-time low. The last 10 SPAC IPOs contained an average of 0.30 warrants per unit, including two with no warrant coverage at all.
Warrant coverage keeps declining but issuance doesn't show any signs of slowing down. For those who were wondering if Pershing Square Tontine Holdings' (PSTH) $4bn IPO in July would throw a wrench in the steady stream of IPOs, the answer was: clearly not. Since that time, Churchill Capital Corp IV (CCIV) upsized from $1bn to $1.5bn to $1.8bn, and the underwriters exercised the full shoe for a trust account that has over $2bn in it. SPACs have raised more than $4.5bn in August already, and Dragoneer Growth Opportunities Corp. (DGNR) was able to cut its warrant coverage twice in the week leading up to its IPO and still close its first day of trading at $10.68.

If we're looking for an explanation of why common stock and warrant prices have pulled back a bit but IPO issuance has remained strong, it's probably worth looking toward the composition of day one SPAC investors. Historically, SPAC arb funds took most of the available IPO allocations, but it seems likely that the product's basic appeal of principal-protected downside with equity-like upside has finally taken hold with a much broader investor base.

If a new crop of market participants has made a long-term decision to allocate to SPACs as an asset class without watching every security tick-by-tick, it's possible the market can support elevated issuance for a while to come. Either way, we're looking forward to analyzing the recently filed 13Fs this week to see where the traditional SPAC holders stand and how they positioned themselves during Q2.

News From the Past Week

IPOs
  • Dragoneer Growth Opportunities Corp. (DGNR) raised $600mm for an acquisition in software, internet, media, consumer/retail, healthcare IT or financial services/fintech. DGNR is led by Marc Stad, founder and CEO of Dragoneer Investment Group, a growth-oriented investment firm with over $10bn in AUM. The SPAC has two forward purchase agreements for a total of $175mm. Citigroup, Goldman Sachs and J.P. Morgan are joint book-runners.

  • RedBall Acquisition Corp. (RBAC) raised $500mm for an acquisition in sports, media and data analytics, with a focus on professional sports franchises. RBAC is chaired by Gerald Cardinale and Billy Beane. Cardinale, who joined forces with the New York Yankees and the Steinbrenner family to create the YES Network in 2001, is the founder of RedBird Capital Partners, a $4bn private investment firm. Beane, the former general manager of the Oakland Athletics, is known for bringing an analytical approach to talent and scouting in Major League Baseball, as chronicled in Michael Lewis' 2003 book "Moneyball". The board of directors includes professional sports team owners and executives, as well as Richard Thaler, the Nobel Prize-winning behavioral economist. Goldman Sachs is sole book-runner.

  • Fortress Value Acquisition Corp. II (FAII) raised $300mm without a specific sector focus. FAII is led by Joshua Pack, who is managing partner of the Credit Funds business at Fortress, and has 20 years of credit investment and workout experience. Pack and much of FAII’s management team also led Fortress Value Acquisition Corp. (FVAC), which raised $345mm in April 2020 and announced a definitive agreement to acquire MP Materials in July 2020. Pack and CEO Andrew McKnight also served as directors of Mosaic Acquisition Corp. (MOSC), which raised $345mm in October 2017 and acquired Vivint Smart Home (NYSE: VVNT) in January 2020. Deutsche Bank, Morgan Stanley, and BofA are joint book-runners.

  • dMY Technology Group, Inc. II (DMYD) raised $220mm in an upsized IPO for an acquisition in mobile apps and related AI or machine learning companies. dMY2 is led by the same team as dMY1 (DMYT), which raised $230mm in February 2020 and announced a business combination with Rush Street Interactive in July 2020. CEO Niccolo de Masi is the chairman and former CEO of Glu Mobile (NASDAQ: GLUU), a freemium mobile gaming company. Chairman Harry You, who served as the EVP of EMC Corporation (formerly NYSE: EMC), was a co-founder of GTY Technology Holdings (NASDAQ: GTYH), which raised $552mm in November 2016 and merged six SaaS businesses to form GTY GovTech, a cloud-based service provider to state and local governments, in February 2019. Goldman Sachs is sole book-runner.

  • Lionheart Acquisition Corporation II (LCAP) raised $200mm for an acquisition in proptech. LCAP is led by Ophir Sternberg, the founder of Lionheart Capital, a global real estate development firm. In March, Sternberg took over Opes Acquisition Corp., which is looking to close a business combination with fast casual restaurant chain BurgerFi. LCAP also features a $100mm forward purchase agreement with Nomura Securities. Nomura and Cantor Fitzgerald are joint book-runners.

  • FS Development Corp. (FSDC) raised $121mm in an upsized IPO for an acquisition in biotechnology. FDSC is led by Jim Tananbaum, the founder and CEO of Foresite Capital, a healthcare-focused venture capital firm with over $3bn in AUM. Jefferies is sole book-runner.

S-1's
  • CM Life Sciences, Inc. (CMLF) filed to raise $350mm for an acquisition in life sciences. CMLF is led by Eli Casdin and Keith Meister. Casdin is the founder and CIO of Casdin Capital, an investment firm focused on the life sciences and healthcare industry. Meister founded Corvex Management LP, a New York-based investment manager with over $2.5bn in AUM. Both firms will participate in a $150mm forward purchase agreement. Jefferies is sole book-runner.

  • Broadstone Acquisition Corp. (BSN) filed to raise $300mm for an acquisition of coronavirus-stressed businesses in Europe and the UK. BSN is led by Hugh Osmand and Marc Jonas, co-founders of Sun Capital Partners, a global private equity firm with over $7bn in AUM. Citigroup is sole book-runner.

  • Prime Impact Acquisition I (PIAI) filed to raise $300mm for an acquisition in the data economy. PIAI is led by co-CEOs Michael Cordano and Mark Long. Cordano was the CEO of Western Digital Corporation (NASDAQ: WDC), a developer, and manufacturer of data storage devices, from October 2015 until March 2020. Long served in executive roles for WDC during Cordano's tenure, and the pair both worked for Hitachi Global Storage Technologies, a manufacturer of disk drives and external storage devices, prior to their time at WDC. Goldman Sachs and BofA are joint book-runners.

  • North Mountain Merger Corp. (NMMC) filed to raise $115mm for an acquisition in fintech. NMMC is led by Charles Bernicker, founder and CEO of South Mountain Merger Corp. (SMMC), which raised $250mm in June 2019 and is also seeking an acquisition in fintech. Bernicker was CFO of CardConnect during its acquisition by FinTech Acquisition Corp., and has since acted as advisor to several other companies that were acquired by SPACs, including Repay (NASDAQ: RPAY) and International Money Express (NASDAQ: IMXI). NMMC Directors Scott O'Callaghan, Douglas Pauls and Nicholas Dermatas serve in similar roles for SMMC. Citigroup is sole book-runner.

  • Brookline Capital Acquisition Corp. (BCAC) filed to raise $50mm for an acquisition in life sciences in the US and Europe. BCAC is led by Samuel Wertheimer, who acts as a scientific advisor for Brookline Capital Markets. Wertheimer was previously the founder of Poliwogg, Inc., a financial services firm focused on healthcare investing, and a private equity partner at OrbiMed Advisors, a healthcare-dedicated investment firm. Director James Hauslein previously served on the Board of Directors of Atlas Acquisition Holdings Corp., Easterly Acquisition Corp. (EACQ), Freedom Acquisition Holdings Inc., GLG Partners, Inc. and Liberty Acquisition Holdings Corp. CFO Patrick Sturgeon also serves as CFO and Secretary of Alpha Healthcare Acquisition Corp. (AHAC), which filed to raise $100mm for an acquisition in healthcare in the United States in August 2020. Ladenburg Thalmann is sole book-runner.

Deal Announcements, LOIs and Rumors
  • Software Acquisition Group Inc. (SAQN) announced a deal to acquire CuriosityStream Inc., a global independent factual media company led by Discovery Channel founder John Hendricks. The deal reflects an enterprise value of approximately $331mm. It carries a $60mm minimum cash condition and includes a $25mm PIPE commitment. The transaction is expected to close in Q4 2020.


Charter Extensions

  • AGBA’s sponsor made a deposit to its trust account, activating its second optional extension until 11/16/2020.
  • INSU bumped its extension meeting date up from 9/18/2020 to 9/10/2020.
  • KBLM and 180 Life Sciences Corp. extended their outside date until 11/9/2020.
  • FMCI and Ittella International extended their outside date until 11/15/2020.

Upcoming Meetings and Deadlines
  • 8/18/2020 PACQ HighPeak Energy approval meeting (liquidation deadline 8/21/2020)
  • 8/24/2020 FPAC Global Blue approval meeting (liquidation deadline 9/14/2020)
  • 8/27/2020 CCH Utz approval meeting (liquidation deadline 10/9/2020)
  • 8/27/2020 TDAC Charter extension meeting (liquidation deadline 9/1/2020)
  • 8/27/2020 HCAC Charter extension meeting (liquidation deadline 9/5/2020)


Links

  • Sidley Austin attorneys Jeffrey Smith and Michael Heinz published an article in Bloomberg Law with a look at SPACs and private equity.
  • Goldman Sachs' "Exchanges" podcast hosted SPAC banker Olympia McNerney for a conversation about the state of the SPAC market.
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.