Spacs forced to fund deals with more expensive financing

Special purpose acquisition companies updates

Blank-cheque companies are turning to expensive sources of financing to push their deals over the line in a fresh sign of stress in what had been one of the hottest corners of Wall Street.

Several companies that recently announced plans to go public by merging with a special purpose acquisition company, or Spac, have recently raised cash to fund the deals by issuing convertible bonds, a form of debt that can be swapped into stock.

Spacs are shell companies that raise money by listing on the stock market before hunting for a target to merge with, but they typically require more capital to fund the stake being acquired. The target companies have tended to raise that extra cash from institutional investors who write big equity cheques via a mechanism known as Pipe financing.

But Pipe financing is drying up, forcing companies to find other sources of funding. BuzzFeed, which last month agreed a deal with 890 Fifth Avenue Partners to go public at a $1.5bn valuation, secured an additional $150m through convertible bonds in lieu of a so-called Pipe.

Jonah Peretti, the digital media group’s chief executive, recently told the Financial Times that Pipe financing had been hard to come by.

At least two other Spac deals announced in June went down the same route. Boxed said it would raise $86m in convertible bonds after agreeing to go public through a merger with Seven Oaks Acquisition at a $900m valuation. And, a data analytics company, secured $200m through convertible notes for its deal with GigCapital4, a Spac, last month.

“The Pipe market has basically been shut so it isn’t surprising that you’re seeing these types of structures,” said a senior bank executive who works on financing for Spac deals. “But, it’s a last resort.”

Convertible bonds provide protection to the buyer in the form of interest payments and, if the share price slides after the deal is completed, the investor can opt to keep the instrument as debt and be repaid the principal.

But the rate of interest that companies being acquired by Spacs must pay on the convertible debt they are issuing is significantly higher than average. And those interest payments can eat into future profitability.

The five-year note in the BuzzFeed deal has a 7 per cent coupon that could rise to 8.5 per cent. The notes in the Boxed deal also pay 7 per cent of interest. The typical yield on convertible debt is about 1.5 per cent this year, according to Refinitiv.

“It was taken for granted last year that you could raise a Pipe,” said Joshua DuClos, a partner at Sidley Austin, a law firm. “Now you have many more Spacs that need to do a deal and less Pipe availability so they have to look at alternative structures.”

Some dealmakers say that the use of convertible debt is not necessarily a sign of a problem with a Spac or the company it hopes to acquire.

Anna Pinedo, a partner at Mayer Brown, the law firm, said: “Every [convertible bond] is not a suggestion of a rocky deal . . . Some very nice deals have had a convert and the convert has been to one very big institutional investor or one very big strategic [backer].”

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