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Water Tower Research

Research from Water Tower Research

Water Tower Research is a leading equity research firm that provides research on micro, small and mid cap companies.

Water Tower Research was founded by Wall Street veterans after witnessing a fundamental shift in the investment research industry with the result being a declining knowledge base among investors, a lack of awareness and a shrinking pool of fundamental research being conducted on companies across the small-cap and micro-cap spectrum. The same issues are now increasingly occurring in the mid-cap space. This sea change within the investment community is impacting not only the companies themselves but also current shareholders and potential investors. With significantly less active sell-side sponsorship by Wall Street, a substantial information gap has developed between companies and various constituents in the financial community. The net result is fewer channels for insight and information to flow between companies and investors.

Equity Research Firm

Thematic (Sector/Industry)

<h2>KEY HIGHLIGHTS</h2>
<ul>
<li>Backlog of SPAC IPOs is likely to dwindle further.&nbsp;With the environment for SPACs continuing to be highly challenging, there remain 609 live SPACs still searching for merger targets. It is therefore no real surprise to see the pipeline of pending SPAC IPOs continuing to shrink. So far this year 65 SPAC IPO filings have been withdrawn or abandoned, leaving the pipeline of pending IPOs at 181 as of now. This figure represents 60% of the peak number of filings (314) recorded at the end of 2Q21. The backlog will, in all likelihood, continue to dwindle, and more so given that last year’s leading SPAC IPO underwriter, Citigroup, has put a temporary hold on underwriting new SPAC IPOs until it can determine the full extent of the legal obligations and liabilities underwriters like it would incur because of the new SEC proposed rules announced at the end of last month.</li>
<li>More liquidations on the horizon?&nbsp;Liquidations have hitherto been rare events in SPAC land. Only two SPACs have been liquidated since the start of 2021. There has been a noticeable shortening of the timeframe to complete an IBC (initial business combination) since the start of 2021 from two years to about a year or even less. While most SPACs with pending deadlines have sought. and have succeeded in getting, shareholder approvals for extensions, we expect the extent of SPAC over-saturation will increase the pressure for liquidations. As of today, 23 SPACs still searching for targets have less than three months to complete an IBC.</li>
<li>Overfunded trusts—good or bad for sponsors?&nbsp;Over the past several quarters there has been an increasing tendency for sponsors to overfund SPAC trust accounts as an incentive to entice IPO investors. In 1Q22, trust accounts averaged $10.17 per unit at the IPO. In the last quarter, 94% of the SPAC IPOs completed were overfunded by an average of 1.7%. Our SPAC Talk Focus explores whether there is ultimately any value to the sponsor and the SPAC market from overfunding.</li>
</ul>
<h2>SPAC STATISTICS</h2>
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<h2>SPAC/DE-SPAC RETURNS</h2>
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<h2>SPAC TALK FOCUS</h2>
<h2>The Conundrum for SPAC Sponsors of Overfunding Trusts</h2>
<p>One of the emergent features of SPACs over the past year has been the trend in overfunded SPAC cash trusts. A SPAC’s cash trust is ordinarily where the capital that is raised from its IPO is placed, effectively in an escrow account, from which the monies therein can only be disbursed for the de-SPAC process, or to return the capital to the SPAC’s public shareholders, whether as a result of the SPAC’s liquidation should it not be successful in finding a target within the specified period, or as a result of the public shareholders' choice to redeem the shares before the de-SPAC occurs.</p>
<p>Rising redemption rates and the drying up of traditional PIPEs (private investment in public equity) have made financing conditions for SPACs increasingly challenging for sponsors. At the same time, although this more challenging environment has slowed the flow of new SPAC IPOs over the past several months, it has not shuttered the SPAC IPO market. As Figure 1 shows, SPAC IPOs are currently running at 30 per quarter.</p>
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<p>With 609 SPACs still searching for targets as of today, competition among SPACs for funds has become very intense. But, as the adage goes, necessity is the mother of invention, and SPAC sponsors have had to be creative to find alternative financing sources, whether it be the increasing use of convertibles, backstop arrangements, or structured PIPEs with added sweeteners thrown into the mix to incentivize investors. However, the priority for sponsors has been to make sure that there is enough interest to get the SPAC IPO done. To this end, we have seen an increasing tendency for SPAC sponsors to overfund their trust accounts over the past several quarters, typically by up to 2%, and a few by 2.5%-3%. As Figures 2 and 3 highlight, not only has the degree to which new SPACs are being overfunded risen, but there has also been an increasing number of SPAC IPOs that have come to market with overfunded trust accounts. Indeed, more than 90% of the SPAC IPOs that were priced in the past two quarters have brought overfunded trust accounts.</p>
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<p>One might ask how much can overfunding, typically by 2%, help the sponsors? As Figure 1 illustrates, overfunded trusts have not stopped the slowdown in SPAC IPOs, but the SPAC IPO market could, arguably, have been even slower without them. The sponsors are incentivizing shareholders to subscribe to the SPAC IPO with the ability to lock in a minimum return of 2% which, although it may not sound like much of an incentive, would appeal to some investors, as it has for much of the past year been attractive when compared with 10-year US Treasuries.</p>
<p>However, overfunding SPAC trust accounts leaves sponsors with a conundrum. Overfunding trust accounts effectively provides a greater incentive to public shareholders to exercise redemption rights. It reduces the likelihood that the public shares will be trading above the redemption price at the time of the business combination, thereby reducing the likelihood of a de-SPAC transaction. Moreover, this can be exacerbated by the participation of arbitrageurs. The combination of overfunded SPACs and redemption rights creates an attractive arbitrage market in pre-merger SPACs, which potentially attracts post-IPO investors with the incentive to earn an even greater yield when pre-merger SPAC prices trade below $10. Yet the participation of arbitrageurs yields no benefit to the sponsors.</p>
<p>There is another question to ponder. In the current environment in which the 10-year US bond is above 2.5% and rising, the cost to SPAC sponsors will increase further. To what extent will SPAC sponsors be willing to dig deeper into their own pockets to overfund trust accounts to ensure SPAC IPO success in in an oversaturated US SPAC market where the opportunities of completing a business combination are becoming more limited?</p>
<p>Perhaps, making the decision not to overfund trusts will accelerate a much-needed rebalancing of the currently oversupplied SPAC market to the longer-term benefit of sponsors and the SPAC asset class.</p>
<h2>DISCLOSURES</h2>
<p>Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.<br><br>WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.<br><br>Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.<br><br>Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.<br><br>In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.<br><br>The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.<br><br>The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.<br><br>All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.</p>

KEY HIGHLIGHTS

Backlog of SPAC IPOs is likely to dwindle further.&nbsp;With the environment for SPACs continuing to be highly challenging, there remain 609 live SPACs still searching for merger targets. It is therefore no real surprise to see the pipeline of pending SPAC IPOs continuing to shrink. So far this year 65 SPAC IPO filings have been withdrawn or abandoned, leaving the pipeline of pending IPOs at 181 as of now. This figure represents 60% of the peak number of filings (314) recorded at the end of 2Q21. The backlog will, in all likelihood, continue to dwindle, and more so given that last year’s leading SPAC IPO underwriter, Citigroup, has put a temporary hold on underwriting new SPAC IPOs until it can determine the full extent of the legal obligations and liabilities underwriters like it would incur because of the new SEC proposed rules announced at the end of last month.
More liquidations on the horizon?&nbsp;Liquidations have hitherto been rare events in SPAC land. Only two SPACs have been liquidated since the start of 2021. There has been a noticeable shortening of the timeframe to complete an IBC (initial business combination) since the start of 2021 from two years to about a year or even less. While most SPACs with pending deadlines have sought. and have succeeded in getting, shareholder approvals for extensions, we expect the extent of SPAC over-saturation will increase the pressure for liquidations. As of today, 23 SPACs still searching for targets have less than three months to complete an IBC.
Overfunded trusts—good or bad for sponsors?&nbsp;Over the past several quarters there has been an increasing tendency for sponsors to overfund SPAC trust accounts as an incentive to entice IPO investors. In 1Q22, trust accounts averaged $10.17 per unit at the IPO. In the last quarter, 94% of the SPAC IPOs completed were overfunded by an average of 1.7%. Our SPAC Talk Focus explores whether there is ultimately any value to the sponsor and the SPAC market from overfunding.

SPAC STATISTICS


SPAC/DE-SPAC RETURNS






SPAC TALK FOCUS
The Conundrum for SPAC Sponsors of Overfunding Trusts
One of the emergent features of SPACs over the past year has been the trend in overfunded SPAC cash trusts. A SPAC’s cash trust is ordinarily where the capital that is raised from its IPO is placed, effectively in an escrow account, from which the monies therein can only be disbursed for the de-SPAC process, or to return the capital to the SPAC’s public shareholders, whether as a result of the SPAC’s liquidation should it not be successful in finding a target within the specified period, or as a result of the public shareholders' choice to redeem the shares before the de-SPAC occurs.
Rising redemption rates and the drying up of traditional PIPEs (private investment in public equity) have made financing conditions for SPACs increasingly challenging for sponsors. At the same time, although this more challenging environment has slowed the flow of new SPAC IPOs over the past several months, it has not shuttered the SPAC IPO market. As Figure 1 shows, SPAC IPOs are currently running at 30 per quarter.

With 609 SPACs still searching for targets as of today, competition among SPACs for funds has become very intense. But, as the adage goes, necessity is the mother of invention, and SPAC sponsors have had to be creative to find alternative financing sources, whether it be the increasing use of convertibles, backstop arrangements, or structured PIPEs with added sweeteners thrown into the mix to incentivize investors. However, the priority for sponsors has been to make sure that there is enough interest to get the SPAC IPO done. To this end, we have seen an increasing tendency for SPAC sponsors to overfund their trust accounts over the past several quarters, typically by up to 2%, and a few by 2.5%-3%. As Figures 2 and 3 highlight, not only has the degree to which new SPACs are being overfunded risen, but there has also been an increasing number of SPAC IPOs that have come to market with overfunded trust accounts. Indeed, more than 90% of the SPAC IPOs that were priced in the past two quarters have brought overfunded trust accounts.


One might ask how much can overfunding, typically by 2%, help the sponsors? As Figure 1 illustrates, overfunded trusts have not stopped the slowdown in SPAC IPOs, but the SPAC IPO market could, arguably, have been even slower without them. The sponsors are incentivizing shareholders to subscribe to the SPAC IPO with the ability to lock in a minimum return of 2% which, although it may not sound like much of an incentive, would appeal to some investors, as it has for much of the past year been attractive when compared with 10-year US Treasuries.
However, overfunding SPAC trust accounts leaves sponsors with a conundrum. Overfunding trust accounts effectively provides a greater incentive to public shareholders to exercise redemption rights. It reduces the likelihood that the public shares will be trading above the redemption price at the time of the business combination, thereby reducing the likelihood of a de-SPAC transaction. Moreover, this can be exacerbated by the participation of arbitrageurs. The combination of overfunded SPACs and redemption rights creates an attractive arbitrage market in pre-merger SPACs, which potentially attracts post-IPO investors with the incentive to earn an even greater yield when pre-merger SPAC prices trade below $10. Yet the participation of arbitrageurs yields no benefit to the sponsors.
There is another question to ponder. In the current environment in which the 10-year US bond is above 2.5% and rising, the cost to SPAC sponsors will increase further. To what extent will SPAC sponsors be willing to dig deeper into their own pockets to overfund trust accounts to ensure SPAC IPO success in in an oversaturated US SPAC market where the opportunities of completing a business combination are becoming more limited?
Perhaps, making the decision not to overfund trusts will accelerate a much-needed rebalancing of the currently oversupplied SPAC market to the longer-term benefit of sponsors and the SPAC asset class.
DISCLOSURES
Water Tower Research (“WTR”) is a professional publisher of investment research reports on public companies and, to a lesser extent, private firms (“the Companies”). WTR provides investor-focused content and digital distribution strategies designed to help companies communicate with investors.  WTR is not a registered investment adviser or a broker/dealer nor does WTR provide investment banking services. WTR operates as an exempt investment adviser under the so called “publishers’ exemption” from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940. WTR does not provide investment ratings / recommendations or price targets on the companies it reports on. Readers are advised that the research reports are published and provided solely for informational purposes and should not be construed as an offer to sell or the solicitation of an offer to buy securities or the rendering of investment advice. The information provided in this report should not be construed in any manner whatsoever as personalized advice. All users and readers of WTR’s reports are cautioned to consult their own independent financial, tax and legal advisors prior to purchasing or selling securities.  Robert Sassoon, who is the writer of this report, covers the Emerging Growth &amp; Special Situations sector for WTR. Mr. Sassoon and members of his household have no personal or business-related relationship to the subject company other than providing digital content and any ancillary services WTR may offer.  Unless otherwise indicated, WTR intends to provide continuing coverage of the covered companies. WTR will notify its readers through website postings or other appropriate means if WTR determines to terminate coverage of any of the companies covered.  In certain instances, including this report, WTR will write research covering non-clients. Readers should assume that WTR may seek to turn these non-paying companies into paying clients. Likewise, WTR may seek to transform these non-clients into paying clients of it or of its affiliate, which provides services such as presenting at sponsored investor conferences, distributing press releases, advising on investor relations and broader corporate communications and public relations strategies as well as performing certain other related services (“Ancillary Services”). The companies that WTR covers in our research are not required to purchase or use Ancillary Services of WTR or an affiliate might offer to clients.  The manner of WTR’s potential research compensation and Ancillary Services to covered companies raise actual and perceived conflicts of interest. WTR is committed to manage those conflicts to protect its reputation and the objectivity of employees/analysts by adhering to strictly written compliance guidelines.  The views and analyses included in our research reports are based on current public information that we consider to be reliable, but no representation or warranty, expressed or implied, is made as to their accuracy, completeness, timeliness, or correctness. Neither we nor our analysts, directors, officers, employees, representatives, independent contractors or agents shall be liable for any omissions, errors or inaccuracies, regardless of cause, foreseeability or the lack of timeliness of, or any delay or interruptions in the transmission of our reports to content users. This lack of liability extends to direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, losses, lost income, lost profit or opportunity costs.  All investment information contained herein should be independently verified by the reader or user of this report. For additional information, all readers of this report are encouraged to visit WTR’s website www.watertowerresearch.com.

SPAC Talk: The Sponsor’s Conundrum of Overfunding Trusts

United States

TerraForm Global, Inc. owns and operates contracted clean power generation assets. The Company offers wind, geothermal, hydroelectric, and hybrid energy solutions. TerraForm Global serves customers worldwide.

SPAC Talk: The Sponsor’s Conundrum of Overfunding Trusts

KEY HIGHLIGHTS Backlog of SPAC IPOs is likely to dwindle further. With the environment for SPACs continuing to be highly challenging, there remain...

Water Tower Research