SPACs — Have We Seen the Bottom?
July 29, 2022 — As SPACs have made the difficult transition from “venture capital for the speculative public market investors” to “discounted T-Bills for the conservative asset allocators”, special purpose acquisition companies went from trading at the peak of nearly 28% premium to NAV (i.e. $12.80 for a $10.00 SPAC) during the frenzy last spring to bottoming at an average -2% discount to NAV (i.e. $9.80 for a $10.00 SPAC) several weeks ago.
While the average SPAC discount to NAV hit its record earlier this month, SPAC arbitrage yields peaked on July 7th at 5.8% and have begun to decline slowly. Since prices rise as yields fall, the SPAC Index has gained during 16 trading sessions in a row, with a modest average daily gain of 0.03%.
Yields have begun to fall steadily, while prices have slowly but surely started to increase, due to three main reasons:
1. Declining Treasury yields — Since the SPAC frenzy of late 2020/early 2021 fizzled, and the market turned from bull to bear, blank check securities have turned from volatile bets for speculators to discounted T-bills for risk-averse absolute return investors. Over the past year, SPAC arbitrage yields have primarily traded in line with 2-year Treasury bond yields plus a 200–300bps premium.
Treasury bond yields peaked in mid-June and have declined approximately 40bps since. SPAC yields have followed, although not to the same extent.
2. Declining Supply — Pre-Covid, the SPAC market was a $20 billion backwater. By spring 2021, it was a $200 billion asset class. After reaching a record 720 SPACs outstanding in May 2022, supply has declined to 692 securities as maturing SPACs have outnumbered new issues. The blank check market has fallen from $200 billion to $170 billion, mainly by returning capital to shareholders through redemptions and liquidations.
July will be the first month in recent history with no SPAC IPOs, based on our data going back to April 2019.
As capital is returned to investors, they need to reinvest the proceeds. If demand stays constant while supply shrinks, then prices will rise.
3. Slight Improvement in Sentiment — SPACs have been in a bear market for more than a year and have been mired in poor sentiment, as manifested through ubiquitous NAV discounts. For example, last month a record 99% of SPACs were trading at a discount to NAV, up from 0% trading at a discount in March 2021.
Currently, 97% of SPACs are trading at a discount to NAV, which is nothing to write home about, just a modest improvement compared to last month’s 99%.
We are confident that the SPAC supply decline will continue for the foreseeable future. The blank check market remains significantly oversaturated, and therefore sponsors remain largely uninterested in launching new vehicles into a highly competitive market. Investors recycling capital from maturing SPACs into seasoned issues at attractive yields will support the recovery in prices and the continuing improvement of historically large discounts.
Sentiment in the space cannot get much worse with 97% of SPACs trading below NAV. Just a slight improvement in sentiment can swing things dramatically upward. In any event, arbitrageurs, and to a lesser extent fixed income investors, are picking up SPACs as yield vehicles, which support prices.
The third driver of future price performance, Treasury yields, are much more difficult to predict (by difficult we mean impossible). Regardless, Treasury yields will continue to be the primary driver of SPAC returns as long as sentiment remains weak and the market remains oversupplied. If/when the blank check market attains a balanced supply with level sentiment, then the market will discern between quality, which will trade at a premium to NAV, and junk, which will trade at a discount. In a balanced environment, fundamentals, not Treasury yields, will be a key driver of returns.
For now, nearly everything trades at a discount and there is $3.7 billion of arbitrage profit (the aggregate difference between SPAC prices and NAVs) available for enterprising investors to pick up. How long it will last is anyone’s guess, however, the recent formation of a bottom in prices is a decent bet.
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.
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