SPAX Q3 2021 Commentary & Outlook

Image of Jonathan Browne, Portfolio Manager at Robinson Capital
Jonathan Browne, Portfolio Manager at Robinson Capital
SPAX Q3 2021 Commentary and Outlook

The Robinson Alternative Yield Pre-Merger SPAC ETF (ticker: SPAX) recently completed its first full quarter.

The Fund returned a negative 0.45% for the quarter on a price basis; it returned a negative 0.24% on a net asset value basis.

Below is the third quarter attribution analysis for the Fund’s NAV return relative to its benchmark index:*

SPAX INVESTS EXCLUSIVELY PRE-MERGER SPACs

The Fund invests exclusively in pre-merger SPACs because that is the only time in a SPAC’s life in which it behaves as a bond. In fact, SPAX remains the only ETF that has specifically hard-coded into its prospectus that it must not hold any SPACs after the completion of a merger. The intent of the Fund is to provide a higher yielding and less volatile alternative to traditional fixed income and/or absolute return strategies.

NEW ISSUES HAD MORE ATTRACTIVE TERMS, AFFECTING THE SECONDARY MARKET

We started the third quarter with 430 SPACs looking for a merger partner. In addition, there were another 300 sponsors looking to go public with a SPAC IPO (i.e., they had submitted an S-1 Filing with the SEC). Over the course of the quarter there were 61 merger announcements, which was good news for pre-merger SPAC investors. Unfortunately, 89 of those previously filed S-1 sponsors decided to go public with their SPACs during the quarter.

In a market already trading at a discount due to more supply than demand, any new offering needs to be priced at least as attractively as the existing market. As a result, most of the new SPAC IPOs issued in Q3 had shorter maturities (rather than the typical 24 months, most of the new ones had 12-18 month maturities), offered at discounts (the SPAC sponsor added 10-20 cents to the Trust value, meaning a $10 investment was redeemable in 12-18 months for $10.10 or $10.20); and, most of the new SPAC units came to market with ½ to 1 warrant (a 5-year call option that entitles the holder to acquire additional shares at an $11.50 price) attached (historically SPAC units had, on average, 1/3 warrant attached). In short, the more attractive terms offered by the new issues caused the existing secondary market of SPACs to take a leg down in order to remain competitive.

MERGER ANNOUNCEMENTS AND PRICE POPS

The underlying pre-merger SPAC market appeared to hit bottom toward the end of August. At that point the pre-merger SPAC index (a proprietary index we maintain that tracks all domestic publicly traded SPACs from their inception to their redemption) was down 1.6% QTD; it rallied more than 0.9% through the end of the quarter from that bottom to end the quarter down 0.67%. Our fund benefitted meaningfully through a higher participation rate in merger announcements. Specifically, roughly 1 in 7 of the overall pre-merger SPAC universe announced a merger transaction during the quarter—our fund had 1 in 6 announce mergers. Typically, pre-merger SPACs experience a price pop on a merger announcement; and, they also experience large volume days which allow us to monetize those price pops.

TOP 5 REASONS WE BELIEVE NOW IS THE TIME FOR SPAX

  1. Higher Yield: while pre-merger SPACs don’t generate income, they do have a yield due to their redemption date and value. The entire pre-merger SPAC universe had a yield-to-worst (i.e., that implies that none of the SPACs ever finds a merger partner) of 2% 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 1.6%.
  2. Downside Mitigation: 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 6.7 years (a 1% rise in rates will lead to approximately a 6.7% price decline in the index).**
  3. Upside Potential: as we saw in Q3, 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% and an average time to maturity of 15 months. A comparable maturity Treasury zero coupon bond, held to maturity, offered a yield of 0.14% at the end of the quarter.
  5. 40% Solution: higher yield, true downside mitigation, none of the interest rate or credit risk, and meaningful upside potential, provides a better 40% solution than traditional fixed income strategies.

*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.

** S&P ratings represent Standard & Poor’s opinion on the general creditworthiness of a debtor, or the creditworthiness of a debtor with respect to a particular debt security or other financial obligation. Ratings are used to evaluate the likelihood a debt will be repaid and range from AAA (excellent capacity to meet financial obligations) to D (in default). In limited situations when the rating agency has not issued a formal rating, the security is classified as non-rated (NR).

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