Corporate Financing Analysis - Latest SPAC IPO Is Reminder Of Impending Slowdown - 21 AUG 2017


Fuelled by almost uninterrupted tranquillity in markets across the first half of the year and in the weeks since, 2017 has so far proven to be a great year for equity capital market (ecm) fundraising for US special purpose acquisition companies (SPACs). But as the latest upcoming floatation deal from a blank check company approaches, BMI highlights that the impending slowdown in SPAC public market listings and in US IPO activity more broadly which we have long been forecasting is drawing ever closer ( see, ' US IPO Rally Facing Plenty Of Downside Risk ' , March 29 2017). As of the time of writing, we find ourselves in the middle of the annual US IPO summer hiatus - but even by typical August standards, this one is shaping up to be an especially quiet one. As Renaissance Capital data show, only one float is on the IPO calendar for the next four weeks, and that is from blank check firm Capitol Investment Corporation IV. The firm is hoping to tap ecm investors for as much as USD350mn at a market value of USD438mn and add to what has already been a record year for SPAC ecm fundraising ( see, ' Tide Set To Turn Against The SPACs ' , June 21 2017). Indeed, in the y-t-d period, as many as 18 SPACs have gone public with a combined worth of USD5.5bn, putting 2017 well on course to become the most popular year for such deals since prior to the onset of the global financial crisis back in 2007 when as many as 58 blank check companies listed in New York on either the NYSE or Nasdaq bourses, tapping ecm investors for as much as USD10.7bn in the process. In fact, even with well over a quarter of the year left to run, 2017's haul of deals has already outpaced the USD3.2bn raised across 13 SPAC floats successfully completed across the 2016 full-year period - as shown by Renaissance Capital data. Despite all the overwhelmingly positive sentiment in terms of raw numbers, we once more highlight our bearish view that the current bull run will not last for long. Furthermore, at the time of this most recent SPAC first time share sale, we have three clear leading indicators to point to in order to support this view.

Reasons To Be Careful: 1, 2, 3

First up, we highlight that first-day pops for 2017 SPACs has been muted at as low as 0.8%, as shown by Renaissance Capital data. Secondly, we point to the average aftermarket returns from IPO to present day for US SPACs, standing at a disappointing level of 1.8%, which is well below the 10.08% y-t-d return of the benchmark S&P 500 index in 2017 to-date - Bloomberg data show. Perhaps most significantly for the near-term outlook of both SPAC floats and US IPOs more broadly is the final indicator of an impending shift in sentiment: the Chicago Board Options Exchange's (CBOE) VIX 'fear gauge' has seen a spike over the last week which has seen it reach a y-t-d high and shown that the risks of a downturn in market sentiment are getting stronger by the day. After all, with US stock valuations sat at their second highest level on record (and second only to where they stood at in 2000 before the dotcom bubble burst), equities have a long way to fall, and in our view that is exactly what will happen as the real GDP growth story begins to unwind and further market volatility creeps in. After all, SPACs offer plenty of upside to investors presuming that the successful completion of an acquisition is made by such a vehicle. However, it is those same investors which are expected to absorb all the risk should the company fail to complete its intended purpose of making an acquisition. In light of this, the move by BMI 's Global Team to downgrade our global real GDP growth forecast for 2018 to 2.9% from 3.0% previously (largely due to a downward revision to our already below-consensus US growth expectations for 2018 to 2.1%, down from an already below consensus level of 2.2% forecast previously), lowering the average annual expansion of growth over the next five-years at 2.90% will have some investors sitting a little more uncomfortably than they were previously, and in turn apply the brakes on the SPAC IPO rally.

An Impressive Haul
US SPAC IPOs By Deal Value, USDbn
Source: Renaissance Capital , BMI

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