SPACs as Cash Alternative with Upside Optionality

[5xEBITDA]

So now there are SPACs with merger dates set in 1-4 months that are trading at or under $10.

 

Redeeming a SPAC with a merger seems to be easy - call the broker by deadline (usually a few days before merger), request redemption. There’s usually another deadline a couple or so weeks before - you’d have to have purchased the shares by then (but it sounds like that rule isn’t always followed) Then you get your shares on hold, and in a week you get your $10 + interest.

 

I think you are referring to the record date. Read the specific prospectus for each spac to see their rules for this, it is market these days to be a record holder only two days before the special meeting in order to redeem your shares. There is an earlier record date, sometime when the deal proxy is filed, but that only governs your ability to vote yes / no on the deal, so you don't care about it. But make sure to double check the language. It'll be in the S1.

 

Now, in the meanwhile your get free  optionality. So during those 1-4 months:

-if the SPAC drops to 9, you just redeem it for 10+interest (this exact scenario has happened before) most people aren’t aware of the process and the deadlines

The market is very aware of the deadlines. That's why on a bad deal you'll see the shares start to drop because you can no longer purchase shares with intent to redeem, so the shares trade on a "when issued" basis for the deal.

-if the SPAC stays at 10, you can always sell it or keep it after merger

 

- if the SPAC goes up 50%, sell it and keep the profit

Yes, but it is tricky if it pops 50% after you've already indicated to your broker you want to redeem.

 

Is there any downside? Maybe the very low risk that everyone redeems because there’s a new virus pandemic - but even during March 2020 the contracts and redemptions were honored. And sure there’s some opportunity cost. But it’s only 1-4 months. And you can time the purchase by the purchase deadline so you only wait a few weeks (but by then you’ll have a smaller duration of optionality.

 

The one distinguishing factor is - i think it’s tougher to redeem if there isn’t a merger and you have to wait longer and you might not get the full 10 back. But I’m not as familiar with that process. That’s why I think the merger announcement arbitrage seems interesting.

The cynic in me points out that short term rates are so low the amount of interest accrual is negligible, it probably won't equal a penny difference between deal merger and expiration redemption. So, its fair to say your ending trust value should look the same between the two dates, the only difference is the IRR. It's sort of like a YTC > YTW trade. One caveat here is that SPACs with trusts less than $1 billion probably aren't generating enough interest income to cover expenses including franchise taxes (if it is a Delaware incorporation), which means you are not looking at a flat $10 back, more like $9.99 - $9.97 or so. Just something to keep in mind.

 

Answered your questions in bold. But yeah, buying short term spacs below trust is the classic arb in the space.

[Jurgis]

+1 what 5xEBITDA said.

 

The market is getting somewhat rational in terms that prices dropping below $10 are:

- Crappy deals that likely won't pop

- Crappy deals that cannot be redeemed anymore

- Crappy deals that may not get approved by shareholders

- Tentative deals that are crappy or won't get signed

- SPACs that don't have a deal and may never have a pop-y deal

 

A diversified collection may return more than cash, but at this time it may take effort and $$$ to diversify and it may not be worth either time or effort or $$$.

If one could trust SPCX management, SPCX might be the right no-effort bet. But it's tough to trust that they will invest well.

 

Disclosure: I own a bunch of crap. I may buy/sell/etc.

[dpetrescu]

Those are good clarifications that you make. But - I don’t think I communicated clearly what an unusual opportunity it was - this amazing setup was not for SPACs in general, but for one specific setup. Last week pretty bad for the SPAC market, the mean price for all (I mean all without exaggeration) SPACs was $10.00. So below is the setup I was referring to. This might have only been possible last week but who knows.

 

I think a lot of people are dismissing them because they’re early stage companies without revenue and generally very overvalued. But just put that aside and consider the arbitrage:

 

1. Buy a SPAC with a deal already announced. Now this is a real company that you’re investing in, not in a team with pile of cash.

 

2. You now have 3-4 months to take advantage of any upside - 5%, 10%, 100% in that time period. That is the average time for DA to merger. There is no opportunity cost because you’re investing in a company that you select (again, not a blank shell company). There’s a fairly good chance that most of these move up quite a lot IF we’re just experiencing a correction and tech stocks in genera rebound. For example Friday I picked up AONE/Markforged for 4% risk ($10.4). So I’m risking 3 months of wait time and maximum 4% loss but if it doubles I get the full profit. Essentially it’s like owning a free put without having to buy the put. Also HZON/Sportsradar for 7% risk with unlimited upside - this is actually a good company with a competitive market dominance. Others are 0% risk.

 

3. If during that 3-4 months the price is still $10, just sell your shares.

If shares are lower than $10 you can redeem them for cash ($10.02, maybe $9.96 but in practical terms just about $10.0). True you have to do it before the deadline which is earlier than the merger date. Here’s the redeem process:

https://optionsly.substack.com/p/redeeming-a-spac-for-cash

 

This unusual opportunity might have only been possible last week because Friday, a lot of the good post deal names moved up a lot. But the correction could continue next week or beyond who knows.

 

So now there are SPACs with merger dates set in 1-4 months that are trading at or under $10.

 

Redeeming a SPAC with a merger seems to be easy - call the broker by deadline (usually a few days before merger), request redemption. There’s usually another deadline a couple or so weeks before - you’d have to have purchased the shares by then (but it sounds like that rule isn’t always followed) Then you get your shares on hold, and in a week you get your $10 + interest.

 

I think you are referring to the record date. Read the specific prospectus for each spac to see their rules for this, it is market these days to be a record holder only two days before the special meeting in order to redeem your shares. There is an earlier record date, sometime when the deal proxy is filed, but that only governs your ability to vote yes / no on the deal, so you don't care about it. But make sure to double check the language. It'll be in the S1.

 

Now, in the meanwhile your get free  optionality. So during those 1-4 months:

-if the SPAC drops to 9, you just redeem it for 10+interest (this exact scenario has happened before) most people aren’t aware of the process and the deadlines

The market is very aware of the deadlines. That's why on a bad deal you'll see the shares start to drop because you can no longer purchase shares with intent to redeem, so the shares trade on a "when issued" basis for the deal.

-if the SPAC stays at 10, you can always sell it or keep it after merger

 

- if the SPAC goes up 50%, sell it and keep the profit

Yes, but it is tricky if it pops 50% after you've already indicated to your broker you want to redeem.

 

Is there any downside? Maybe the very low risk that everyone redeems because there’s a new virus pandemic - but even during March 2020 the contracts and redemptions were honored. And sure there’s some opportunity cost. But it’s only 1-4 months. And you can time the purchase by the purchase deadline so you only wait a few weeks (but by then you’ll have a smaller duration of optionality.

 

The one distinguishing factor is - i think it’s tougher to redeem if there isn’t a merger and you have to wait longer and you might not get the full 10 back. But I’m not as familiar with that process. That’s why I think the merger announcement arbitrage seems interesting.

The cynic in me points out that short term rates are so low the amount of interest accrual is negligible, it probably won't equal a penny difference between deal merger and expiration redemption. So, its fair to say your ending trust value should look the same between the two dates, the only difference is the IRR. It's sort of like a YTC > YTW trade. One caveat here is that SPACs with trusts less than $1 billion probably aren't generating enough interest income to cover expenses including franchise taxes (if it is a Delaware incorporation), which means you are not looking at a flat $10 back, more like $9.99 - $9.97 or so. Just something to keep in mind.

 

Answered your questions in bold. But yeah, buying short term spacs below trust is the classic arb in the space.

[ValueArb]

My broker (Interactive Brokers) wants to charge me $300 to separate the warrants and shares in SPAC units, is that typical?

 

I was thinking of buying new SPACs at or under $10, splitting them a month later, then selling the shares and keeping the warrants. But looks like I'll need to put a minimum of $20k in each position in each account, or the separation fees will eat me up.

[5xEBITDA]

My broker (Interactive Brokers) wants to charge me $300 to separate the warrants and shares in SPAC units, is that typical?

 

I was thinking of buying new SPACs at or under $10, splitting them a month later, then selling the shares and keeping the warrants. But looks like I'll need to put a minimum of $20k in each position in each account, or the separation fees will eat me up.

 

Does your broker charge you for other corporate actions? They should not be charging you for this, it is just the click of a button.

[ValueArb]

My broker (Interactive Brokers) wants to charge me $300 to separate the warrants and shares in SPAC units, is that typical?

 

I was thinking of buying new SPACs at or under $10, splitting them a month later, then selling the shares and keeping the warrants. But looks like I'll need to put a minimum of $20k in each position in each account, or the separation fees will eat me up.

 

Does your broker charge you for other corporate actions? They should not be charging you for this, it is just the click of a button.

 

They don't typically. But I guess they wanted to get in on the SPAC gold rush too...

[5xEBITDA]

My broker (Interactive Brokers) wants to charge me $300 to separate the warrants and shares in SPAC units, is that typical?

 

I was thinking of buying new SPACs at or under $10, splitting them a month later, then selling the shares and keeping the warrants. But looks like I'll need to put a minimum of $20k in each position in each account, or the separation fees will eat me up.

 

Does your broker charge you for other corporate actions? They should not be charging you for this, it is just the click of a button.

 

They don't typically. But I guess they wanted to get in on the SPAC gold rush too...

 

I think that's ridiculous and would escalate the issue as high as you can. Will they charge you when you have to make an election to redeem or not? Or how you want to vote on a deal?

[bizaro86]

My broker (Interactive Brokers) wants to charge me $300 to separate the warrants and shares in SPAC units, is that typical?

 

I was thinking of buying new SPACs at or under $10, splitting them a month later, then selling the shares and keeping the warrants. But looks like I'll need to put a minimum of $20k in each position in each account, or the separation fees will eat me up.

 

Does your broker charge you for other corporate actions? They should not be charging you for this, it is just the click of a button.

 

They don't typically. But I guess they wanted to get in on the SPAC gold rush too...

 

I think that's ridiculous and would escalate the issue as high as you can. Will they charge you when you have to make an election to redeem or not? Or how you want to vote on a deal?

 

No. IB is really good about doing corporate actions. Except SPAC splits, which they treat as 3 transfers at $100 each (units out, shares in, warrants in). I think its because they have basically everything else automated and this is manual? Not sure.

[5xEBITDA]

You can probably just call the SPAC's transfer agent (most likely Continental) and request they split the units yourself.

[scorpioncapital]

Interesting, IBKR quoted me $500 not $300 to separate. Maybe they really are in on the spac craze.

 

[ValueArb]

Interesting, IBKR quoted me $500 not $300 to separate. Maybe they really are in on the spac craze.

 

I'm going to do one on Monday. I'll try to call the transfer agent first and see if they'll do it, then I'll use IB and let you know what they charged me.

[Spekulatius]

I get the sense that a lot of SPAC’s are going to break $10; the market is getting flooded with their things. Some of the better ones may be interesting, I guess Sponsor quality will matter a lot going forward.

[Gregmal]

Last year was a record year for spac. Something like a 350%+ increase in IPOs from year prior(after basically nothing happening in Q1). Last I checked, 2021 had already produced 30% more IPOs than 2020....shit is kicked as the kiddos say.

 

Buying units close to, or under $10 is still a reasonable proposition, depending upon the setup, IMO. But the expectation needs to be reset.

[Gregmal]

https://seekingalpha.com/news/3675669-spac-market-is-a-lot-of-out-of-control-barry-sternlicht-says

 

Its all going to play out in a very predictable way.

[ValueArb]

I get the sense that a lot of SPAC’s are going to break $10; the market is getting flooded with their things. Some of the better ones may be interesting, I guess Sponsor quality will matter a lot going forward.

 

The main ones I'm tracking are starting to trade at a discount.

[Spekulatius]

I bought some pre-deal KVSA(Koshla Ventures) @ $10, already slightly under water. Seems like those folks should have good deal flow and I like that there are no warrants.

Either it pops or it doesn’t. No post deal SPACS for me.

[Gregmal]

Who needs to study market cycles/bubbles. You basically got the full thing condensed into the past 18 months with SPACs. Right back to where we were in 2019....except for the whole 500 empty shells currently looking for deals thing....

 

I/we went from getting 1-2(maybe 3 on occasion) IPO offers per month in 2019 and most of 2020....to seeing 3-4 per week the past few months. Haven't done one since maybe mid/late January. No point anymore. Part of me wonders if the sheer glut of these things on the books at certain shops may create some sporadic opportunity a bit lower than the normal 9.9-10 figure. Generally, you'd have unlimited supply of institutional takedown for the dollar volume but lack of shareholders necessary to get the IPO launched. Once retail got into the game it became inevitable things would get wild. But retail also aint holding $10 paper for 18 months for 2%. If you start seeing 9.7 of so it could be quite enticing...practically free money if you can utilize the 1% margin at IB. Of course IB seems to charge you to split the units(never tried myself), but most other shops still do it free of charge. Might even make sense to hold the units at IB and then ACAT individual positions to a Fidelity or whatever where they can be split up for $0.

[ValueMaven]

Ackman's SPAC below $20 (cash in the trust) is interesting if it ever gets there.  What morons paid $32 for this thing I'll never know (50% premium to cash)...it's really the only one I'm interested in. 

[Lakesider]

Ackman's SPAC below $20 (cash in the trust) is interesting if it ever gets there.  What morons paid $32 for this thing I'll never know (50% premium to cash)...it's really the only one I'm interested in.

 

I think it was quite popular with the reddit crowd for a while.

[Spekulatius]

Who needs to study market cycles/bubbles. You basically got the full thing condensed into the past 18 months with SPACs. Right back to where we were in 2019....except for the whole 500 empty shells currently looking for deals thing....

 

I/we went from getting 1-2(maybe 3 on occasion) IPO offers per month in 2019 and most of 2020....to seeing 3-4 per week the past few months. Haven't done one since maybe mid/late January. No point anymore. Part of me wonders if the sheer glut of these things on the books at certain shops may create some sporadic opportunity a bit lower than the normal 9.9-10 figure. Generally, you'd have unlimited supply of institutional takedown for the dollar volume but lack of shareholders necessary to get the IPO launched. Once retail got into the game it became inevitable things would get wild. But retail also aint holding $10 paper for 18 months for 2%. If you start seeing 9.7 of so it could be quite enticing...practically free money if you can utilize the 1% margin at IB. Of course IB seems to charge you to split the units(never tried myself), but most other shops still do it free of charge. Might even make sense to hold the units at IB and then ACAT individual positions to a Fidelity or whatever where they can be split up for $0.

 

There is the old adage that there are either more idiots than paper (=bull market) or more paper than idiots (=bear market). I guess right now we have the latter in SPAC land.

[thepupil]

Ackman's SPAC below $20 (cash in the trust) is interesting if it ever gets there.  What morons paid $32 for this thing I'll never know (50% premium to cash)...it's really the only one I'm interested in.

 

While I didn’t pay $32, owning it was slightly less moronic than it seems given the options premiums available (or short the warrants which I didn’t do).

 

I’m considering adding to my covered calls today.

 

Alternatively, I may cover the Dec 40’s that in short in my IRA’s (down about 2/3) and just own outright at the now reasonable 10-15% premium, but I’d still like that to be a bit lower

[dpetrescu]

Ackman's SPAC below $20 (cash in the trust) is interesting if it ever gets there.  What morons paid $32 for this thing I'll never know (50% premium to cash)...it's really the only one I'm interested in.

HPX is my most interesting one. It’s in Brazil where there aren’t 400 other groups cold calling boards of private companies - at least none with any local connections. And I know it’s a far stretch - but it there is any chance that Berkshire could participate in a PIPE, this would be it - sure it won’t be munger or Warren directly because it would never reach that level of investment value. But I could imagine a scenario where 3G and Berkshire could be involved in a PIPE together. If the company acquisition is interesting and a good value. Not a prediction, I’m making this up. But it’s a strong 3G connection, and Berkshire and 3G have collaborated in the past, with buffet saying he would collaborate with them in the future.

[nik_explores]

Hi All,

Is there a website or a free service which alerts you when a deal announcement is done for a SPAC?

I am planning to follow this strategy for parking some cash.

Essentially, doing this

1) Buy close to cash NAV

2) sell on deal announcement price pop.

As time is critical factor for selling on the deal announcement pop, just wondering if there is a website or service which can alert when a deal announcement is done.

Currently, i go to spactrack.net everyday to see if there is any news for the SPAC i follow.

 

Any recommendations?

 

[5xEBITDA]

Just set an alert for 8Ks to go to your email for the SPACs you're invested in and you should be good. There are free services out there

[nik_explores]

17 hours ago, 5xEBITDA said:

Just set an alert for 8Ks to go to your email for the SPACs you're invested in and you should be good. There are free services out there

Thanks for the help. I just setup 8K Alerts from https://www.secfilings.com/. Lets see