Debt Financing Gains Ground as PSPC Space Matures | White & Case LLP



In a rapidly maturing PSPC market, sponsors are turning more frequently to debt financing tools to finance transactions

At the start of the Special Purpose Acquisition Company (SPAC) boom, an abundance of IPOs, PIPEs (private investment in public capital) and other equity products available to fund acquisitions meant that PSPC sponsors were often not interested in tapping the debt markets to complete a transaction. Now, however, as the SAVS markets mature, the attitudes of sponsors appear to be changing.

As the initial wave of IPOs by PSPC and PIPE subsided, PSPC sponsors began to seek debt instruments to fund PSPC merger and acquisition transactions.

In late 2020 and in the first quarter of 2021, PSPCs – blank check companies that raise funds in the stock markets to acquire M&A targets of private companies – were able to easily fund their transactions with additional equity from investors. institutions via PIPE structures, thanks to investor demand for exposure to PSPC transactions.

The availability of PIPE funding, however, tightened during the year 2021. According to Dealogical, the average size of a PIPE when a de-PSPC deal was announced was US $ 108.5 million in October, down from US $ 164.5 million in September and nearly two-thirds below from the August average of US $ 298.7 million.

Dealogical also notes that the average amount of capital raised from PIPEs was 59.7% of the amount raised from IPO SPAC in October, against 77.8% in September and 91.5% in August.

PIPES clogged

As the supply of PIPE capital diminished, more and more examples of PSPC sponsors using debt instruments to partially fund PSPC M&A transactions have emerged. Buzzfeed, the digital media company, entered into a US $ 1.5 billion deal with 890 Fifth Avenue Partners SPAC, which was partially funded by a US $ 150 million convertible bond. The note was issued with a duration of five years with a coupon of 7%.

Other de-PSPC deals that involved the issuance of convertible bonds included online grocer Boxed, which was taken over by Seven Oaks Acquisition, and the merger between data analytics firm and 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 deal raised US $ 200 million from convertible bonds.

Debt Agreement Flow

As the PSPC space continues to mature, debt financing is likely to become a more common feature in financing packages used to facilitate de-PSPC transactions. This should provide a rich flow of transactions for lenders given the large sums of capital that SPACs have raised and now need to invest.

According to Dealogical, the number of PSPC IPOs reached a record high of 404 listings in the first nine months of 2021, up 274% from the 108 PSPC IPOs secured over the same period in 2020 (228 PSPC were recorded throughout 2020). The value of SPAC’s IPOs for the year through the end of the third quarter of 2021, meanwhile, stood at $ 119.4 billion, already well above $ 78 billion. US surveys during all of 2020.

SPACs generally have two years to complete a merger and acquisition transaction. If they don’t, they have to return capital to the investors. Given the sheer volume of PSPC IPOs in 2020 and 2021 that have yet to be de-PSPC, a significant number of PSPC M&A transactions are expected to close in 2022 and 2023, debt providers being online to benefit from stabilized PIPE funding. At the time of publication, Dealogical data shows that nearly 500 SPACs in the U.S. market are currently seeking targets, a number that may well increase as new SPACs continue to register.

Although lenders anticipate that new funding opportunities will emerge from de-PSPC agreements, PSPC transactions should also remain a tool for PSPC targets to repay lenders and reduce leverage.

Private equity firms in particular have entered into agreements with PSPCs that allow them to retain stakes in target companies while refinancing and repaying pre-acquisition borrowings. Supply chain software developer E2open has struck a deal with CC Neuberger Principal Holdings I SPAC valuing the company at US $ 2.6 billion. A portion of the US $ 1.1 billion in cash raised for the transaction was used to repay US $ 434 billion in debt.

This reflects a broader trend in the PSPC space where, on the whole, companies that undertake PSPC transactions emerge in a more solid financial position after the transaction than before the transaction.

According to a study by Los Angeles-based investment advisor DoubleLine Capital, PSPC transactions have caused prices to appreciate as much as 4% of the face value of debt in target companies as debt investors recognize the benefits of deleveraging and injection of liquidity from the PSPC investment. In a review of 15 PSPC agreements, DoubleLine also found that target companies reduced the ratio of outstanding debt to EBITDA from an average of 5.4 times before the PSPC agreement to 3.8 times. after the agreement.

DoubleLine concluded that given the substantial amounts of PSPC dry powder in the market, lenders and target companies will continue to benefit from improved credit transaction prices when PSPC deals are announced and debt reductions that offer to companies a greater financial margin.

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