Don't Believe Everything you Hear in the Media

Image of Jonathan Browne, Portfolio Manager at Robinson Capital
Jonathan Browne, Portfolio Manager at Robinson Capital
Pre-merger SPACs. See what is missing from most media coverage and why we like them.

The media has continued to paint Special Purpose Acquisition Companies (“SPACs”) in an unfavorable light by highlighting the negative returns of post-merger SPACs. What they fail to report on; however, is the outperformance and positive returns that have been generated by the pre-merger SPAC universe (those SPACs that have yet to complete a deal). Pre-merger SPACs behave like a short duration bond with capital appreciation upside potential and serve as a compelling compliment to traditional fixed income strategies.

In fact, the Robinson Alternative Yield Pre-Merger SPAC ETF (ticker: SPAX) returned +2.67% for the quarter on a price basis and +2.21% for its latest 6 months; it returned +2.58% on a net asset value basis for the quarter and +2.34% for the latest 6 months. While modest on an absolute scale, it is important to keep in mind that the intent of the Fund is to provide a higher yielding and less volatile alternative to traditional fixed income and/or other low volatility alternative yield strategies.

Following is the fourth quarter and trailing 6-months comparative return analysis for the Fund relative to its benchmark index (Bloomberg 1-3 Year Govt/Credit Bond Index), as well as other fixed income and alternative yield strategies:

Screen Shot 2022-01-12 at 1.25.55 AM

The performance data quoted above represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost and current performance may be lower or higher than the performance quoted above. Performance current to the most recent month-end can be obtained by calling (833) 743-0330. Total Expense ratio 0.85 %. 

WHY NOW MAY BE THE RIGHT TIME TO INVEST IN SPACs

We believe the following are our top 6 reasons for WHY NOW to invest in the Robinson Alternative Yield Pre-Merger SPAC ETF (SPAX):

  1. Opportunity for Higher Yield: while pre-merger SPACs don’t generate income, they may have a yield due to their redemption date and value. The cheapest 100 pre-merger SPACs offered a yield-to-worst (i.e. that implies that none of the SPACs ever finds a merger partner) of 2.5%[1] at the end of the quarter—the yield of the overall investment grade bond market as measured by the Barclays Aggregate Bond Index (the entire investment grade investable domestic bond market) was 1.75%.
  2. Downside Mitigation Potential: pre-merger SPACs have the credit and interest rate risk of T-Bills (AAA rating), whereas the Barclays Aggregate Bond Index has an average credit quality of AA (a notch below the credit rating of Treasuries) and a duration (a measure of a bond’s sensitivity to changes in interest rates) of 6.8 years (a 1% rise in rates will lead to approximately a 6.8% price decline in the index).

  3. Upside Potential: as we saw in Q4, any merger announcement shortens the time for the SPAC to earn back its discount; and, a positive market reaction to a merger announcement could push SPAC prices well above their redemption values.

  4. Absolute Return: Pre-Merger SPACs bought at a discount can be held to redemption for an absolute return. At the end of the quarter, the equal weighted universe of pre-merger SPACs was trading at an annualized yield-to-worst of 2.3%[2] and an average time to maturity of 13 months.

  5. Low Correlation: Pre-merger SPACs tend to have a low correlation with the broad equity market and almost zero correlation with traditional fixed income markets.[3]

  6. 40% Solution:  potential higher yield, downside mitigation, none of the interest rate or credit risk, and meaningful upside potential, provides an alternative solution to traditional fixed income strategies.

[1] Source; Robinson Capital & Bloomberg as of 12/31/2021

[2] Source; Robinson Capital & Bloomberg as of 12/31/2021

[3] Source; Robinson Capital & Bloomberg as of 12/31/2021

 

SPAC MARKET COMMENTARY & 2022 OUTLOOK

We started the fourth quarter with 470 SPACs looking for a merger partner. During that time we saw another spike in issuance as 160 new SPAC Initial Public Offering’s (IPO) raised over $9 billion in fresh SPAC capital. Of course, in order to get the new issues to market required much sweeter terms for pre-merger SPAC investors. Specifically, the terms are shorter - 12-15 months rather than 24 months; the trusts are overfunded on day one - $10.10-$10.20 (which means sponsors are fronting cash into the trust, further incentivizing them to get a deal done) is the new normal compared to $10.00; and, at least ½ warrant per unit as opposed to the 1/3 warrant that was the previous standard.

While the pace of new SPAC issuance increased meaningfully in the fourth quarter, the deal announcement pace remained relatively constant. In the fourth quarter, 60 merger deals were announced compared to the 61 deals that were announced in the third quarter. The biggest difference was the return of the deal announcement “pop” in the fourth quarter. The biggest of them all happened early in the quarter as Trump’s new social media initiative announced its intent to merge with Digital World Acquisition Corp. DWACU’s price immediately popped 70%, and then continued to run up—it closed the year up 500% from its IPO price. In early December Rumble announced its intent to merge with CF Acquisition Corp. VI. CFVIU immediately popped more than 50% on the announcement. It didn’t hold those initial levels, but it remains up 15% over its pre-announcement price. Both of those were core positions in SPAX, which explains the fund’s strong security selection performance during the quarter.

In many ways the underlying pre-merger SPAC market is more attractive now than it was when we launched the fund last summer. The market has much more breadth, new issue terms are more attractive, and deal announcement price pops have returned. Conversely, the traditional bond market has been considerably less attractive in the face of sustained elevated inflation levels (the highest in nearly 40 years) and a much more hawkish Fed.

 

SPAX TOP 10 HOLDINGS

Fintech Evolution Acquis Group SHS, Class A, Liberty Res Acquisition Corp Class A Com, Ault Disruptive Techs Corp, AP Acquisition Corp, Motive Capital Corp II, Ahren Acquisition Corp, Burtech Acquisition Corp, Eve Mobility Acquisition Corp Unit, Healthcare AI Acquisition Corp Unit Ex 120726, Swiftmerge Acquisition Corp 

 

DEFINITIONS

  • Yield-to-Worst is the lowest yield a bond can achieve provided the issuer does not default, such as if a bond has a call feature (ie, the issuer can call the bond back at a date specified in advance).

  • The Bloomberg 1-3 Yr Govt/Credit Index is a broad-based benchmark that measures the performance of investment grade, US dollar-denominated, fixed-rate Treasuries, government-related and corporate securities with 1 to 3 years to maturity.

  • The Bloomberg US Aggregate Bond Index is a broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate pass-throughs), ABS and CMBS (agency and non-agency).

  • The HFRX Absolute Return Index measures the performance of absolute return hedge fund strategies that report their results to Hedge Fund Research.

  • The HFRX Convertible Arbitrage Index measures the performance of convertible arbitrage hedge funds that report their results to Hedge Fund Research.

  • The HFRX Merger Arbitrage Index measures the performance of merger arbitrage hedge fund strategies that report their results to Hedge Fund Research.

Indexes are unmanaged. Direct investment in an index is not possible.

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