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Need a Return on Cash to Weather Coronavirus? B. Riley Finds Yield of Dreams in Blank-Check Companies

John Jannarone

 

  • IPO Edge Reviewed Memo from B. Riley Financial Inc.’s SPAC Desk
  • Several SPACs trade with 3% Yield to Maturity or Greater
  • Forced Selling Likely Pushed Prices to Levels Reminiscent of 2008 Crisis
  • Investors Have Full Right to Redeem for Cash Plus Interest if SPACs Held Until Liquidation
  • SPACs Also Offer Dramatic Upside if M&A Announcements Generate Positive Response

By John Jannarone, IPO Edge

With short-term rates at zero, investors could be forgiven for feeling they have no place to hide besides cash. But recent market turbulence has created an opportunity in a corner of the market that’s often overlooked – special purpose acquisition companies, or SPACs.

Also known as blank-check companies, SPACs raise cash through initial public offerings and park the proceeds in a trust account until they find a target. Once a target is announced, investors have the option of holding onto shares in the new company or getting their money back – plus any interest earned.

But in recent days, SPACs have gone on sale, offering annualized yields of 3% or higher after last week’s selloff apparently triggered forced sales. In a note to clients, investment bank B. Riley FBR’s SPAC Desk, which is separate from the firm’s Research Department, pointed out several SPACs that present an unusual opportunity.

Take Juniper Industrial Holdings, Inc. (ticker: JIH), a SPAC led by two former Honeywell International Inc. executives whom IPO Edge recently interviewed (article link here). Juniper currently trades around $9.55 but can be liquidated by holders who choose to redeem their shares for about $10.05 in November 2021. That implies an annualized yield of about 3.1%, B. Riley FBR’s SPAC Desk points out.

It’s important to note a technical feature of SPACs to understand how investors can harvest such a yield. Holders of SPACs now generally have the option to redeem for cash no matter what – even if they vote in favor of a deal. If a deal winds up getting done, an investor can still redeem for cash (plus a very any small amount of interest likely to be earned in government paper between now and redemption).

Of course, the trade isn’t for everyone. Anyone who invests in a SPAC now could easily see mark-to-market losses if the shares swing lower. And the SPAC could become illiquid from time to time, making it hard to sell at any price. In other words, investors keen to earn the 3% must commit to holding the SPAC until the redemption date.

But there is more to attract investors than the yield – potentially. If a SPAC strikes a deal, it can easily rally sharply – even ahead of the shareholder vote. Just look at Virgin Galactic Holdings, Inc., which traded well above cash value ahead of the shareholder vote last year. That could create an opportunity to either exit at a profit or hold onto a company that has good prospects.

In the case of Juniper, CEO Roger Fradin and CFO Brian Cook have a very strong track record of successful M&A deals, having worked on dozens of them together at Honeywell. And as the Juniper executives pointed out in their interview, industrial companies tend to operate within a more stable market, making themselves less susceptible to market disruptions.

Riley FBR’s SPAC Desk pointed out several other SPACs with similar yields. They include FinServ Acquisition Corp. (ticker: FSRV), which may find a target in the financial services sector and Software Acquisition Group Inc. (ticker: SAQN), a SPAC focused on a software-industry target.

For investors concerned the coronavirus damage isn’t over, these SPACs may be a smart place to hide.

IPO Edge Contact:

John Jannarone, Editor-in-Chief

www.IPO-Edge.com

Editor@IPO-Edge.com

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