Description

Special Purpose Acquisition Companies (SPACs) - An opportunity to obtain US Treasuries at a 8%+ yield

Benjamin Graham discussed value opportunities where the stock is trading less than the liquidation value of the assets.  In most situations,
the practicality of liquidating a company is often remote.  However,

• § What if the asset is US Treasuries held in a trust account?
• § What if you can prevent the company from using the cash for value destroying M&A by share vote?
• § What if the liquidation of the company was scheduled at a pre-determined date?

SPACs offer an opportunity to buy common at a discount to asset value, with a pre-determined liquidation.

SPAC Background

• SPACs are companies that issue shares to the public with the intention of using the cash raised during the initial public offering combined
  with the equity (stock) currency and debt to execute an acquisition.
• The cash raised at the IPO is largely (usually ~97% or more) is held in a trust
• The trust is typically mandated to invest only in short-term government backed securities
• The SPAC has a defined time period to find and execute an acquisition (typically approximately 24 months)
• If the SPAC is unable to complete an acquisition in the allotted time, the cash in trust is returned to the common

Opportunity

• The common shares of many SPACs are trading at a discount to the cash in trust.
• This discount is implying annualized yields of approximately 8%+ if held to the final liquidation date
• The yields have increased from approximately 5% at the end of August, but are off the 10-12% yields of the October - December period
• Most liquidations are within 6-18 months
• The downside is protected by the cash in trust, usually mandated to be invested in 180-day US gov't notes.

 Risks / Concerns

• Many SPACs are illiquid, making trading difficult
• Some SPACs may incur liabilities that exceed agreed upon thresholds - thereby reducing proceeds to common
• Yields may return to the 10-12% levels (perhaps with another round of hedge fund redemptions?), causing a poor mark-to-market
• No / limited upside beyond asset value (few will likely complete a value enhancing acquisition)

 Conclusion

• SPACs offer an interesting opportunity to 'park cash' for the next few months for those willing to hold to maturity (liquidation date)

 SPAC Names / Universe

• There are approximately 40 SPACs with over $75 million in assets and a total market capitalization of roughly $10 billion pus
• Some names that may be interesting compelling include:

TM Entertainment (ticker: TMI)

• - Liquidates in mid-October and is offering an approximate 8.0% yield to the estimated cash in trust of $7.89.
• - One activist fund is attempting to get additional board seats that would enable them to force a vote for an earlier redemption. If they are
  successful, the dollar return will be the same, but the time invested much shorter.

Liberty Acquisition (ticker: LIA)

• - Liquidates in December 2010 - providing an ability to earn the return with a long-term capital gains tax rate.
• - With an estimated $9.80 / share in cash at liquidation, current prices implies a 7.9% annualized return.
• - The sponsor is Martin Franklin and Nicolas Berggruen, who have completed other SPACs so there may be more upside opportunity of a potential
  completed deal with LIA than other SPACs
• - LIA is one of the larger SPAC offerings, providing the most liquidity.

GHL Acquisition Corp (ticker: GHQ)

• - Liquidates in February 2010 - providing an ability to earn the return with a long-term capital gains tax rate.
• - With an estimated $10.00 / share in cash at liquidation, current prices implies a 7.9% annualized return.
• - GHQ has signed up an acquisition of Iridium
• - Therefore, company will have a vote on the deal which may offer (1) opportunity to vote no and get cash back early or (2) upside (or downside)
  of a completed deal (if voted through and you vote yes too).
• - Be careful to buy shares prior to the setting of the record date to enable you to vote no and redeem / convert shares into cash.

Catalyst

Liquidation date sets the hard catalyst event for each SPAC.  A vote on a deal can accelerate the catalyst event - providing the ability for shareholders to vote
"NO" and ask for their pro rata cash back.