In the early stages of the special purpose acquisition company (SPAC) boom, an abundance of IPO, PIPE (private investment in public equity) and other equity proceeds available to fund acquisitions meant that SPAC sponsors were often not interested in tapping the debt markets to complete a transaction. Now, however, as SPAC markets mature, sponsor attitudes seem to be shifting.

As the initial wave of SPAC IPO and PIPE deals has eased, SPAC sponsors have begun looking to debt instruments to finance de-SPAC M&A deals.

At the end of 2020 and in the first quarter of 2021, SPACs—blank check companies that raise equity on stock markets to acquire private company M&A targets—were easily able to fund their deals with additional equity from institutional investors via PIPE structures, thanks to investor demand for exposure to SPAC transactions.

The availability of PIPE financing, however, tightened through the course of 2021. According to Dealogic, the average size of a PIPE at the time of a de-SPAC deal announcement was US$108.5 million in October, down from US$164.5 million in September and almost two-thirds below the US$298.7 million average recorded in August.

Dealogic also notes that the average amount of capital raised from PIPEs was 59.7% of the sum raised from SPAC IPOs in October—down from a 77.8% share in September and 91.5% in August.

Blocked PIPEs

As the supply of PIPE capital tapered off, more examples of SPAC sponsors using debt instruments to partially finance de-SPAC M&A deals have emerged. Buzzfeed, the digital media company, agreed to a US$1.5 billion deal with the 890 Fifth Avenue Partners SPAC, which was partly funded by a US$150 million convertible bond. The note was issued with a five-year tenor at a coupon of 7%.

Other de-SPAC deals that have involved the issuance of convertible bonds include online grocer Boxed, which was picked up by Seven Oaks Acquisition, and the merger between data analytics company BigBear.ai and the GigCapital 4 SPAC. In the US$900 million Boxed deal, US$86 million was raised from convertible bonds priced at 7%, while the US$1.6 billion BigBear.ai deal raised US$200 million from convertible bonds.

Debt deal flow

As the SPAC space continues to mature, debt financing is likely to become a more common feature in the funding packages used to facilitate de-SPAC deals. This is expected to provide a rich seam of deal flow for lenders given the large sums of capital that SPACs have raised and must now invest.

According to Dealogic, the number of SPAC IPOs climbed to a record high of 404 listings in the first nine months of 2021, up 274% on the 108 SPAC IPOs secured over the same period in 2020 (228 SPACs were recorded in all of 2020). The value of SPAC IPO issuance for the year to the end of Q3 2021, meanwhile, totaled US$119.4 billion, already significantly above the US$78 billion raised in all of 2020.

SPACs typically have two years to source an M&A deal. If they fail to do so, they must return capital to investors. Given the sheer volume of SPAC IPOs in 2020 and 2021 that have yet to de-SPAC, a significant number of SPAC M&A transactions are expected to close in 2022 and 2023, with debt providers in line to benefit as PIPE financing levels off. At the time of publishing, Dealogic data shows almost 500 SPACs in the US market currently seeking targets, a number that could well increase as new SPACs continue to list.

Although lenders anticipate that new financing opportunities will emerge from de-SPAC deals, SPAC transactions are also expected to remain a tool for SPAC targets to repay lenders and reduce leverage.

Private equity firms in particular have brokered deals with SPACs that allow them to retain stakes in target companies while refinancing and paying down pre-acquisition borrowings. Platinum Equity Partners, for example, sold down a 20% stake in Vertiv, a maker of cooling equipment used in data centers, to a Goldman Sachs-sponsored SPAC. A portion of the proceeds was allocated to pay down debt and, following the deal, Vertiv was also able to negotiate a new term loan facility, which was used to refinance previous loans and redeem high yield bonds, reducing the company’s financing costs.

In another example, supply chain software developer E2open agreed to a deal with the CC Neuberger Principal Holdings I SPAC valuing the business at US$2.6 billion. A portion of the US$1.1 billion of cash raised for the transaction was used to repay debt of US$434 billion.

These examples reflect a wider trend across the SPAC space where, on the whole, companies undertaking SPAC deals emerge in a stronger financial position post-deal than prior to the transaction.

According to a study from Los Angeles-based investment adviser DoubleLine Capital, SPAC deals have sparked price appreciation of up to 4% in the face value of the debt in target companies as debt investors recognize the deleveraging and cash injection benefits of SPAC investment. In a review of 15 SPAC deals, DoubleLine also found that target companies reduced the ratio of outstanding debt to EBITDA from an average of 5.4x pre-SPAC deal to 3.8x post-deal.

DoubleLine concluded that given the substantial amounts of SPAC dry powder in the market, lenders and target companies will continue to benefit from improving credit trading prices when SPAC deals are announced and debt reductions that provide businesses with more financial headroom.