Spaces forced to finance deals with more expensive financing



Special Purpose Acquisition Company Updates

Blank check companies are turning to expensive sources of funding to get their businesses across the border in a new sign of stress in one of Wall Street’s hottest corners.

Several companies that recently announced plans to go public through a merger with a special purpose vehicle (SPAC) recently raised cash to fund operations by issuing convertible bonds, a form of debt that can be converted into shares.

Spacs are letterbox companies that raise money by listing them on the stock market before looking for a target to merge with, but they usually need more capital to fund the portion purchased. The target companies tend to raise this extra cash from institutional investors who write large equity checks through a mechanism called pipe funding.

But pipe funding is drying up, forcing companies to find other sources of funding. BuzzFeed, which last month agreed to an IPO with 890 Fifth Avenue Partners at a valuation of $ 1.5 billion, secured an additional $ 150 million in convertible bonds instead of a pipe.

Jonah Peretti, the CEO of Digital Media Group, recently told the Financial Times that funding for Pipe was hard to come by.

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

“The pipe market is basically closed so it is not surprising that you see these types of structures,” said a senior bank manager who works on financing Spac deals. “But it’s the last resort.”

Convertibles provide protection to the buyer in the form of interest payments, and if the stock price slips after the transaction is complete, the investor can keep the instrument as debt and repay the principal.

But the rate of interest that companies acquired by Spacs have to pay on the convertible bonds they issue is well above average. And these interest payments can affect future profitability.

The five-year note in the BuzzFeed deal has a 7 percent coupon that could rise to 8.5 percent. The notes in the boxed deal also pay 7 percent interest. According to Refinitiv, the typical yield on convertibles this year is around 1.5 percent.

“Last year it was taken for granted that you could raise a whistle,” said Joshua DuClos, partner at Sidley Austin, a law firm. “Now you have a lot more Spacs to get a deal with and less pipe availability so you have to look for alternative structures.”

Some dealmakers say that using convertible bonds isn’t necessarily a sign of a problem with a Spac or the company they are trying to acquire.

Anna Pinedo, partner at Mayer Brown, the law firm, said, “Everyone [convertible bond] is not a rocky deal suggestion. . . Some very nice deals have been converted and the conversion has been to a very large institutional investor or a very large strategic investor [backer]. “