Four Nigerian companies raised N27.41 billion through Commercial Papers (CP) in the first three months of 2021, thanks to the low-interest rate environment that paved the way for corporates to access cheap capital from the debt market.
Agusto & Co., a local rating agency projects that more than N1 trillion would be raised in corporate debt instruments in 2021, a 10 percent increase from the N910 billion raised in the previous year.
Below the record reported some three years ago, the single-digit interest rate on the risk-free Treasury Bills is expected to remain a key driver in the significant growth projected in the debt market. Especially the offerings of corporates at the short end of the market, in commercial papers, and long-term maturities through corporate bonds.
Start-ups and small businesses, which form the bulk of firms in the country, are left out of the low-interest-rate environment that has been a boon for large corporates who are raising capital at cheaper rates compared to bank loans.
Nigerian small businesses are unable to tap the low-interest rate opportunity because of issues such as documentation and inability to meet listing requirements.
There is an opportunity for Nigerian start-up and investors through the offerings of Special Purpose Acquisition Companies (SPACs) reckons Coronation Merchant Bank in its recent Coronation Conversations note.
According to Coronation “SPACs are exchange-listed shell companies that raise capital through initial public offerings (IPOs) and either merge with or acquire an existing unlisted firm that would rather avoid the rigours of a traditional IPO. Typically, SPACs do not have any underlying businesses and they most often do not have an identified target at the point of fundraising, a fact that would typically be disclosed in the SPAC’s prospectus.”
Coronation explains that investments have primarily been channelled into non-operating vehicles created to identify and seize opportunities either in private or public entities.
The main objectives of the promoters of these vehicles are to inject the funds raised into identified entities through the acquisition of strategic stakes in them to drive business optimisation and achieve alpha returns – SPACs are the vehicles through which investors have chosen to achieve these objectives.
SPACs which have become quite common in recent times are the key driver of global equities transactions, said the bank.
Data compiled by Accelerate Financial Technologies Inc. shows that the global equity capital market has been reacting to the infusion of significant cash investments through SPACs – $83billion in 2020 and over $53billion in the first two months of 2021. If the current pace continues, Coronation Merchant Bank said over $300billion could be raised in 2021.
“We intend to begin to draw attention to possible uses to which SPACs could be put within our markets but first,” Coronation said.
But first, understanding the framework, benefits, limitations and critical success factors of SPACs investment is important if the success of the investment vehicle is to be replicated in Nigeria.
Who would turn down a blank cheque?
SPACs are aptly described as “blank-cheque” companies because they often have loose and speculative investment mandates to acquire or merge with targets typically within a few months and certainly within a two-year time frame, failing which the capital raised is returned to the public shareholders. According to data from Bloomberg, the earliest listing on record of a blank-cheque company dates back to 1993. SPACs used to be regarded as an absolute last resort — if a company could not go public via a regular IPO or attract takeover interest from investors, SPACs provided a viable alternative, Coronation said.
Before 2021, the previous record of SPACs was set in 2007 during the financial crisis when $6 billion was raised globally. Following the financial crisis, investing in an IPO with no commercial operations was considered unreasonable and interest in SPACs diminished significantly, before the boom that began in late 2019.
In a sense, it could be argued that the re-emergence of SPACs may have been informed by the fact that, for the sponsors creating SPACs, the mechanism offers a quicker turnaround for their investments relative to traditional private equity funds, which often seek to harvest on a seven to ten-year time frame.
As more high profile, knowledgeable investors sought yield in the sector, the sight of financial heavyweight sponsors raising SPAC funds afforded the model a better profile and attracted more interest to the sector.
How SPACs work
A SPAC essentially flips the IPO process around – with investors first of all pooling their funds together and no idea what company the funds would be invested in. The required disclosures are therefore easier than for a regular IPO since the issuing entity neither has prior liabilities nor operations.
SPAC deals typically take the form of “reverse mergers”, in which a SPAC takes the name of the business it buys. The acquired company gets the stock ticker and funds quicker than through a regular IPO. The SPAC investors thereby become shareholders in the combined entity and the SPAC sponsor gets a significant stake through the founder’s shares and warrants which in many cases, could exceed 20% of the total shares outstanding of the resulting company.
In the typical SPAC, shares and warrants are sold in a bundled unit. If investors of the SPAC are uncomfortable with a planned purchase upon its announcement, they have the option of selling their shares but keeping the warrants. This in essence gives them the optionality of an upside even for transactions they have opted out of, if a merger or acquisition turns out better than they had expected. This combination of shares and warrants is one of the central attractions to SPACs, especially in a volatile market environment.
Early investors in SPACs get to buy units, which usually consist of one share of common stock and a fraction of a warrant to purchase more stock at a later date. Warrants are considered a valuable kicker, which provides investors with the possibility of additional compensation for their cash, but would otherwise expire worthless if a SPAC fails to close an acquisition within the pre-agreed timeframe. If an acquisition is completed, warrant holders can buy more shares by turning in their warrants, a compelling proposition for investors betting on a rise in share prices of the company resulting from a SPAC merger, after going public.
SPACS can also mean big breaks for the sponsors who organize them, who are rewarded with a sizable chunk of equity when they close a deal. Sponsors can make so much money if they complete a SPAC that some critics worry there’s an incentive to merge with a mediocre company just to get their payday.
From markets in Europe, Asia and South Africa, participants are seeking to get in on the action with SPAC. In 2014, SPAC was introduced to the Johannesburg Stock Exchange (JSE) in South Africa. This came shortly after the JSE amended its listing requirements to accommodate these novel investment vehicles. The new rules permit cash shells to list on the bourse to raise the capital needed to afford the business’s future cash cows.
Is there a future for SPACs in Nigeria?
Coronation says it expects IPOs, mergers and acquisitions, and deal-making to make a comeback as the Nigerian economy recovers. And as a result, SPACs have a unique potential to take the centre stage because of their built-in advantages – speed, control and less uncertainty for founders who want to go public.
However, the adaptability to Nigerian securities law – the Investments and Securities Act and the Listing Rules of the Nigerian Stock Exchange, are yet to be tested in this regard.
According to Coronation, the Nigerian capital market can benefit immensely from localising the SPAC phenomenon but this must start with testing if current regulations have provisions to accommodate the operational framework required to implement SPACs in the country.
The willingness or otherwise of bodies like the Securities and Exchange Commission to permit the listing of shell companies as public entities is another critical consideration.
Regardless of the viability of SPACs in addressing many investment-related issues in Nigeria, clarity of regulation around SPAC listings is essential before any meaningful progress can be made, it said.
