SPACs at NAV - juiced up savings account
Utilizing the unique feature of a SPAC to your advantage
The money SPACs raise in an IPO is placed in an interest-bearing trust account. One unique thing about SPACs is the ability for the investors in the common stock to have the option to redeem their shares for cash. This option occurs during extension votes, merger votes, and upon liquidation if the SPAC is unable to complete a business combination.
This ability to redeem shares creates a ‘floor’ where the stock can not trade below (although they do occasionally and in which case you can buy $1 for less than $1). This feature of SPACs is often overlooked or misunderstood by the financial media and know-it-alls on Twitter.
How to take advantage?
Here is a list of SPACs with a definitive agreement to merge with a target company, trading near cash in trust (NAV). These tend to have decreased opportunity cost vs. pre-deal SPACs. Although you can buy and hold strong SPAC sponsors pre-deal…. its becoming increasingly more difficult, and you can find a bullish case and impressive resume for just about every one. The ones with deals announced offer more frequent turnover for active investors.
ESSC: Ufin Tek
Current Price: 10.06
NAV: 10.06
Premium to NAV: 0.00%
AGBA: Convoy (**Letter of Intent**)
Current Price: 10.50
NAV: 10.49
Premium to NAV: 0.10%
RPLA: Finance of America Equity Capital
Current Price: 10.40
NAV: 10.20
Premium to NAV: 1.92%
CCX: Skillsoft and Global Knowledge
Current Price: 10.35
NAV: 10.11
Premium to NAV: 2.32%
ALAC: SolarMax
Current Price: 11.41
NAV: 10.73
Premium to NAV: 5.96%
Additional Considerations
You’re probably wondering “Why would I hold cash in my account when I can buy a SPAC with 0.00% downside and theoretical unlimited upside?”
Well, there are a few things you need to be aware of if implementing this strategy, which I believe anyone is capable of with a little bit of diligence and effort.
Must beware of the redemption deadlines - the last day you can redeem your shares for cash in trust before the merger is voted on. After this passes, there is no more ‘trust floor’ and your stock can theoretically go to zero like any other stock.
For example, RMG recently merged with Romeo, and the merger vote was 12/28 but the redemption deadline was 5 days before on 12/23.
Vote your shares when necessary - contact your broker with any questions. Even if you choose to redeem your shares for the pro rata cash in trust, you can still vote for or against the proposed item.
Final Thoughts
Utilizing the redemption feature of SPACs is a great use for idle cash, someone who is having a hard time finding new entries, or someone bearish on the overall market. You can also oversize your positions and sleep soundly at night knowing the maximum risk. There are many that are calling this a ‘SPAC bubble’ or saying ‘this will end badly!’ and ‘big $ is dumping these on retail’ — which all may be true. Yes, 9/10 SPACs long-term will probably disappoint.
Here is what they fail to mention: SPACs can be an incredible trading vehicle and have defined downside while the “trust floor” remains. Ironically, buying a SPAC at NAV is actually the most conservative thing you could own, since it is just a pile of cash invested in short-term U.S. government securities.
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Disclosure: The above references are an opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice. The information provided has been gathered using publicly available information from SEC filings.