Having raised an estimated $100 billion this year, hundreds of special-purpose acquisition companies (SPACs) are looking for places to put it.
Many are discovering the junk bond market.
A SPAC is a company that has no assets. It issues stock, then uses the proceed to buy a promising business. The SPAC merges with the business and then disappears, leaving the SPAC’s investors holding shares in the company the SPAC bought.
SPACs are a quick way for companies to raise a lot of cash and go public that might not otherwise be able to.
With markets now crowded with SPACs, some of these “blank check” companies are now buying into ventures with bonds rated as “below investment grade” = junk.
Such SPACs hope a quick cash infusion can help a chosen company pay off or down debt and reverse its sinking prospects.
For example, loans to data-center operator Cyxtera Technologies spiked 16 percent in value in February when it merged with a SPAC, data firm Dealogic reported.
The SPAC surge is riding, in part, on a rise in the number of post-pandemic initial public stock offerings (IPOs) and the surge into the market by momentum or “me-too” traders who buy stocks touted by friends or influencers on social media.
As reported by the Wall Street Journal, IPO and SPAC deals totaled about $200 billion this year as of 20 April, the same total for all of 2020, Dealogic said.
The deals’ aggregate value has surpassed the $180 billion in high-yield bonds sold so far this year, the first time that balance has tipped since 2000, when the dot-com bubble began to deflate.
SPACs’ venture into junk-bond territory has heightened concerns about their viability, which first surfaced earlier this month as the pace of deals slackened and SPACs’ share prices softened.
“It reminds you of when people bought multiple homes with no money down before the mortgage crisis” that set off the Great Recession, André Hakkak, CEO of White Oak Global Advisors, told the WSJ.
However, the high-yield or “junk” bond market is different today, some analysts argue.
More than half of those bonds today are rated double B, the highest rating a junk bond can earn, compared to the historical average of a little more than a third holding that rating, according to Michael Anderson, Citigroup’s director of credit research.
Recently, those high ratings have begun to sink, Daigle countered, which likely will lead to more of those companies sinking further into trouble when the economy slows or the stock market cools.
TREND FORECAST: The estimated $100 billion SPACs already raised this under the guise of buying privately-held companies and then listing them on the stock exchange casino to drive up their value and cash in big is reminiscent of the dot.com boom and the subprime mortgage fiasco.
When equity markets fall into correction territory and the “Roaring 21s” cool down, so, too, will the double-B rated bonds, which will, in turn, worsen the SPAC fiasco.
