by Gayl Mileszko
The pandemic has led us all to spend more time on line, whether at work or at home, and we find ourselves using many shortcuts in our communications to save on keystrokes, avoid mis-spellings, or to prove that we are somehow in-the-know. The cause of the pandemic itself, the SARS-CoV-2 infection, has certainly seen the highest number of new abbreviations. But in social and business conversations, new emojis have been created to take the place of words and we came up with several catchy acronyms for new behaviors and sentiments. In the financial world, these included Fear of Missing Out (FOMO), Holding On For Dear Life (HODL) and Fear, Uncertainty and Doubt (FUD). There are other initialisms for investment strategies that grew in either popularity or disfavor: Financial Independence/Retire Early (FIRE), Environmental, Social and Governance (ESG), and There is No Alternative to Equities (TINA). The spectacular wizards in our information technology departments became our SPOCs – single points of contact – for the tools many of us have needed to conduct our business and remain productive from home, whether preparing specifications, proposals, recommendations, commentary, or curricula. But when we inevitably became overwhelmed by all the texts, emails, private Bloomberg IB messaging, and cloud meeting requests, we could not help but yank off our new blue light reading glasses, reach for a quarantini, and type some quick pointed replies: UNSUB! (Unsubscribe!), YAM? (Yet Another Meeting?) and N/A (Not Available).
In the bond world, high yield (HY) securities are among the most sought after. Demand is unrelenting for higher yielding corporate bonds where year-to-date volume already exceeds $271 billion. Last week, B2/B rated Royal Caribbean sold five-year bonds at par to yield 4.25% and high yield indices closed at record lows of 3.84%. Weekly inflows into high yield municipal bond funds have hit records and the limited number of new issues with tax-exempt yields over 3% are oversubscribed multiple times. Spectacular price tags accompany offerings in the primary and secondary markets. Boston College bonds with 5% coupons due in 2055 have been trading over $165. On the equity side, the pandemic and the Fed-contrived low rates have spurred a record number of initial public offerings (IPOs). Among them, Special Purpose Acquisition Companies (SPACs) have become the sensational BTR (Buy the Rumor) asset.
For those as unfamiliar with SPACs as they are with cryptocurrencies – other financial instruments that have taken off during the pandemic – SPACs are shell companies with no hard assets or sales that are created for the express purpose of accumulating a war chest of cash to effect a merger, capital stock exchange, asset acquisition, stock purchase, or reorganization with one or more yet-to-be-named private business. Less paperwork is involved, so they tend to provide startups with a fast and often easier path to going public.
Investors in a SPAC are speculating as they have no product, operations or revenue to point to. They initially rely upon the vision, track record, reputation, and networks of the management team or sponsors and the prospects of the industries or businesses it targets. More than a year may pass before the target is even identified. After a SPAC is created and funded, the blank-check firm generally has 18-36 months to identify and merge with an operating company and take it public. If the SPAC fails to complete a merger, the money from the capital raise which has been placed in trust with a third party gets returned to initial investors on a pro rata basis; after any allowable expense allocations and inflation adjustments, returns may be negative. In addition, the entity that created the blank-check firm loses the risk capital it put into the launch deal; this can be in the range of $10 million after all the legal, underwriting, regulatory, insurance and operating expenses. So sponsors are under pressure to quickly identify and arrange a merger. Investors who buy shares before a merger occurs have the option to tender them at a gain if they bought at a discount (or at a loss if purchased at an elevated price), or to become shareholders in the newly combined company
The first SPACs arrived in the 1980’s but their popularity exploded last year as those with cash looked beyond lower yielding and returning investments, willing to take on speculative risk. In 2019, 59 SPACS raised only about $13 billion. But celebrity and other high-profile sponsors including Shaquille O’Neal, Serena Williams, Alex Rodriguez, and even former House Speaker Paul Ryan have recently brought new attention to the class. New companies looking to go public work with investment bankers to explore SPACs as an alternative to an IPO or direct listing. Companies including Virgin Galactic and DraftKings accounted for half of all 494 initial public offerings in 2020, with 248 raising more than $83.3 billion. So far this year, more than 345 companies have raised an average of $313 million each, typically priced at a nominal $10 per unit, for a combined total exceeding $107 billion. The pace of issuance slowed in April when the Securities and Exchange Commission provided guidance that SPACs would need to classify their warrants as liabilities instead of equity instruments. Warrants are derivatives that give an investor the right to buy or sell a security at a certain price before expiration. SPACs are required to file a prospectus and periodic reports with the SEC
Investors interested in learning more about SPACs are to encouraged to don their spectacles and carefully review guidance issued by the SEC and FINRA as well as to speak with an HJ Sims representative. SPACs are generally most suited to ultra wealthy investors with longer investment horizons who are able to tolerate high levels of risk for potentially higher levels of reward. Access to this asset class comes in the form of direct investment in units, common stock, and warrants, or via ETFs. Market prices can wildly fluctuate, and these fluctuations may bear little if any relationship to the ultimate economic success of the SPAC. There is risk that attractive business combinations become scarce as the number of SPACs increase and that the interests of the sponsors may differ from those of investors. See all the risks outlined in any SPAC prospectus before considering an investment.
This week marks the first of summer and the last full week of June and we are online again with our spectacles and magnifying glasses, window shopping during the annual Amazon Prime Days. We are following the voting in New York City’s mayoral primary and, along with 47 million other Americans, we are making our travel plans for July 4. Wall Street is following House committee actions on various antitrust bills and remaining obsessed with the various utterances by members of what many call the Federal “Open Mouth” Committee. Last Wednesday, stocks and bonds weakened as markets reacted to the Fed increasing its inflation projection for the year and bringing forward the time frame for the next rate increases. On Friday, the St. Louis Fed President cited prospects for a hike in rates in late 2022 and three more Fed presidents offered their individual views.
The Fed Chair asked traders to please retire the use of the term “tapering” but it has been in our lexicon since 2013 and the mere talk of talk about paring back the $120 billion a month bond-buying program inevitably leads to a selloff. On Tuesday, Jerome Powell further fueled the speculation in testimony on the Fed’s response to the pandemic before the House Select Subcommittee on the Coronavirus Crisis. It could be a full-time job monitoring the Fed chatter, but our attention is also being drawn to the 49 economic data points being released this week including home sales, first quarter GDP, durable goods, consumer sentiment, jobless claims, manufacturing and services indices, inventories. We will not have June Job Openings numbers until August, but we know from recent releases that they soared to a record 9.3 million in April while about 3.5 million Americans are still receiving weekly unemployment benefits and more than 9 million are unemployed.
As of the open on Monday, U.S. Treasuries (as measured by the ICE BoAML index) have posted a year-to-date return of negative 2.65%. Investment grade corporate bonds are down 1.13%, taxable municipal bonds are up 0.81%, investment grade municipal bonds have gained 1.39%, high yield corporate bonds are up 2.99% and high yield municipal bonds are returning 5.05%. As of this writing, the 2-year Treasury yield has risen 11 basis points this month to 0.25%. The 10-year has dropped 11 basis points to 1.48% and the 30-year is down 18 basis points to 2.10%. The 10-year Baa rated corporate bond yield has fallen 17 basis points to 3.03%. So far in June, the Dow is down 2% to 33.876. The S&P 500 is nearly flat at 4,224. The Nasdaq is up 3% to 14,141. Oil prices have increased 11% to $73.66
This week in the municipal bond market, HJ Sims has a $60.3 million refunding and new money issue for Presbyterian Senior Living. The BBB+ rated bonds are structured with serial and term bonds being issued through the Pennsylvania Economic Development Financing Authority with a final maturity in 2046. In the high yield sector, there is a $91.9 million BB+ rated St. John’s Industrial Development Authority refunding for Vicar’s Landing in Ponte Vedra Beach and a $41.2 million BBB- rated Kentwood Economic Development Corporation refunding for Holland Home in Grand Rapids with a forward delivery for next February. Also on the calendar is a $57 million non-rated Public Finance Authority taxable Texas Infrastructure financing for master planned residential communities in the Dallas-Fort Worth area, a nonrated $27.6 million Michigan Finance Authority revenue and refunding bond issue for Aquinas College in Grand Rapids, an $11.6 million non-rated Louisiana Public Facilities Authority deal for Mentorship STEAM Academy in Baton Rouge, and a $30.1 million Ba1 Seminole County Industrial Development Authority issue for Galileo Schools for Gifted Learning in Sanford, Florida. Please contact your HJ Sims representative for information today’s higher yielding taxable and tax-exempt offerings.