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The Coronavirus is Starting to Infect SPACs
by Kristi Marvin on 2020-03-12 at 12:33am

When we were in the thick of the Great Recession, I had a meeting in early January of 2009 in Midtown, on Sixth Avenue. Normally, the area on Sixth Avenue, near Radio City, is a busy corridor.  If you’ve ever been there around lunch time, just trying to navigate the side-walk becomes a real dance of bumped shoulders and two-stepping to avoid the crowds.  However, post-meeting I walked outside around 1:00 p.m. and it was dead.  Nobody on the street and just a few cabs with lights on looking for passengers. I was probably not alone in initially thinking at the time that we would get past “the Great Recession” just like we would any other normal recession, but that day in January, it really hit home.  This was different.

I had the same feeling last night.  I live and work near Lincoln Center and it’s normally pretty busy with people going to the theater, but again, this time there was no one on the street.  In fact, traffic was so light (and no one was honking horns), that it was eerily quiet again, which is a feeling New Yorkers are just not used to.  Clearly, this is going to be bad and it will most likely be devastating to New York City’s economy (and everywhere else), but SPACs, which have so far been insulated from the effects of the coronavirus, are starting to show signs of weakness too.

If we look at the recently IPO’d SPACs that haven’t split their units yet, Churchill III (CCXX.U), which as recently as a week ago, had their unit trading around $10.45, is now currently trading at $10.06. Flying Eagle (FEAC.U), another high-profile, brand-name SPAC, has their unit trading at $10.09.  However, we also have a number of units trading BELOW $10.00.  Greenrose (GNRSU) is showing $9.85, East Stone (ESSCU) is at $9.90, and Newborn (NBACU) $9.95.  When SPACs start trading at a discount to their IPO price, that is really not a good sign.

Normally, “traditional” SPAC investors, the yield or arb players, are comfortable investing over a 12-24 month time horizon, knowing that at worst, they can expect a yield at maturity for their “loan”.  So it’s rare to see a SPAC trade below it’s IPO price of $10.00 since nobody is all that interested in selling and typically, SPAC trading volumes are extremely light. However, not all traditional SPAC investors are solely invested in just SPACs.  So, they may need the cash right now, particularly if they are levered. As a result, even some traditional SPAC investors might be selling right now.

But what about the long-only investors that have been investing in SPACs as of late?  They’re not as accustomed to holding a position for 24 months for a blank check company, particularly in an environment such as this, so they are most likely the first to leave.  And if we look at the 1/4 warrant deals, where traditional SPAC investors were cut back significantly on allocations to make room for the long-only crowd, the current share prices imply that long-only no longer wants to be there.

As you can see in the chart below, as recently as Friday, March 6th, the current crop of 1/4 warrant deals were still trading at premium prices. But on Monday morning, the stock market sold off, prompted by the Russia/Saudi oil-price war, and the 1/4 warrant SPAC deals which had shareholder bases with a significant amount of long-only investors, began to see their prices drop too.  The long-only crowd is usually the first to sell.  They are not investing based on a yield, so do they really want to have their investment tied up right now for 24 months?  Perhaps they’d rather have the cash to deploy elsewhere once the market reaches a bottom?

chart (3)

*Note: the prices for “today” in the above chart represent a snapshot from ~11:30AM.  The prices are still moving.

So what does this tell us about the SPAC market going forward?  For one, selling a SPAC IPO just got a lot harder for the elite 1/4 warrant structured deals.  Long only investors are probably not going to be there in the way these deals want (need?) them to be and that means, traditional SPAC investors will be getting much bigger allocations. Whether any of these deals need to revise terms, i.e., come down to a 1/3 warrant, remains to be seen.  However, my gut says there is still enough appetite and they won’t.  However, it will probably be very difficult for any subsequent IPOs getting ready to file to come out with a 1/4 warrant if long-only, sector investors, are not there.  Traditional SPAC investors will move to the front and they will certainly push back on the 1/4 warrant structure.

Social Capital Hedosophia should price both of their SPACs (II & III) next week, so we should get a better sense of where the market is headed based on those two IPOs.  In the meantime, it looks like terms might be in flux again.

 

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