Credit Conditions: Macro to Micro SPACs in Just the Right Tune

Sure it looks tough out there. Yet there are some bright spots. Whatever happens at next week’s Federal Reserve meeting Wall Street is prepared for either a quarter-point or a half-point rate cut and that is good news for investors and the markets in general.

This expectation comes as strong economic data in the US led this week by Ford defied the credit crisis. We are in a situation now where the dollar has risen against both the euro and the yen. But with oil prices still over one-hundred dollars a barrel investors are again turning to Treasuries to cover their bets. So what’s a deal maker to do in this climate?

On the macro level I say deal makers should continue to look to emerging markets. Both the Brazilian and the Russian economies continue to grow at leaps and bounds with GDP rising respectively to 26% and 17%. Analysts are forecasting that Vietnam is also set for continued fast pace growth as is Nigeria; and of course there is always China and India.

At the micro level deal making goes on and certainly will not grind to a halt. If for no other reason than global GDP continues apace. For now private equity firms are continuing to invest the cash on hand. Risk metrics at many firms however are being reviewed and seem to be settling at 5 or 6 times EBITDA. Meanwhile the due diligence process is either being revamped or is under serious revision depending on the firm and its sector specialties.

Under the current credit conditions Special Purpose Acquisition Corporations (SPACs) which have existed since the ‘90s are receiving renewed attention. SPACs are publicly traded investment vehicles that allow public shareholders to participate in buys generally performed by private equity. SPACs go public with the purpose of participating in M&A deals mostly to reap proceeds from a deal’s IPO.

Since inception SPACs have been on the rise. According to Dealogic a provider of global investment banking and analysis 65 SPACs launched last year to raise approximately $12 billion. These offerings represented 22% of all IPOs and a significant increase from the 37 started in 2006.

Unlike private equity deals anyone can buy shares in a SPAC. SPACs are regulated because they are public entities. Specific time frames are required for an investment to be found and consummated with majority shareholder approval. Similar to private equity SPAC deals do not require debt. As Kara Stearns-Sharp Director of Advisory Services for Kaufman Rossin. points out “Once the credit markets rebound these deals may be candidates for refinancing.””

Sharp goes on to say “”Sellers too might find advantages in being acquired by a SPAC. In these deals the company’s management is allowed to continue running the business and benefit from the upside of public market participating including the access to capital.”

Sharp advices that sellers should pay acute attention to complete and accurate documentation. Her checklist calls for ensuring that:

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