August 24, 2021 — Six months ago, the SPAC market was about flying taxis, innovative electric vehicle charging and futuristic battery technology.
Now that the party has turned into a hangover, the SPAC market now represents plain-old discounted Treasury bills.
Specifically, buying a SPAC at $9.60 or $9.70 is analogous to buying a short-term T-bill at 96 to 97 cents on the dollar. However, on an after-tax basis, yield gained through SPAC arbitrage is vastly superior to that of bonds, given the yield generated through SPACs is via tax-efficient capital gains.
Nonetheless, as over 97% of the blank check market trade at a discount to NAV, the speculative retail bid has left the market while the yield-seeking institutional bid has entered.
Why buy BBB bonds yielding 2.2% with real credit risk when the average SPAC yields 2.3%?
Source: Accelerate, Bloomberg
Despite favourable equity and bond market conditions, sentiment in SPACs remains poor and yields continue to rise. As a result, SPAC yields have increased from 1.7% last month to 2.3% today, which is a level not reached since the depths of the Covid-led market panic in early 2020.
Given nearly every SPAC is out of the money (i.e. trading below NAV), volatility and risk have fallen to new lows. The SPAC VIX hit a new record-low 1.1. For reference, the equity VIX is 17.2.
The cause of the sluggishness in the blank check market is mainly due to oversupply. The market reached its saturation point in February, however, the new-issuance train kept chugging. $6.3 billion has been raised across 34 SPAC IPOs over the past month. Although there have been a record 25 deSPACs over the same period, the net supply of blank check companies has not stopped growing. Nonetheless, with over 50% of SPAC IPOs breaking price (i.e. falling below $10.00) lately, and a large portion of new issuers having to grant exceptional terms to investors to participate in their IPOs, the new issuance market may be finally slowing. There has been just one SPAC IPO over the past 10 days, an early sign of a positive trend in a market flooded with supply.
Understandably, many investors have become frustrated with blank check securities as returns have been flat for seven months while equity markets continue to rock n’ roll. Nevertheless, it is my view that buying a security at 96 to 97 cents on the dollar, with the option to redeem for one dollar in twelve to twenty-four months, while having a free call option on positive sentiment of SPACs trading up, is a pretty phenomenal risk/reward. For investors willing to be patient, it may be an opportune time to move allocations from corporate bonds to SPAC arbitrage, given the relative improvement in yield combined with a reduction in risk.
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 in the market. 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.
Disclaimer: This research does not constitute investment, legal or tax advice. Data provided in this research should not be viewed as a recommendation or solicitation of an offer to buy or sell any securities or investment strategies. The information in this research is based on current market conditions and may fluctuate and change in the future. No representation or warranty, expressed or implied, is made on behalf of Accelerate as to the accuracy or completeness of the information contained herein. Accelerate does not accept any liability for any direct, indirect or consequential loss or damage suffered by any person as a result of relying on all or any part of this research and any liability is expressly disclaimed. Accelerate may have positions in securities mentioned. Past performance is not indicative of future results.