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Louis Camhi on the opportunities in the SPAC market (Podcast #97)
Louis Camhi returns to the podcast to provide an update on his thesis on ORGN and then walk through where he’s seeing opportunities in the SPAC market.
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Transcript begins below
Andrew Walker: Hello and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker and with me today, I'm happy to have back on, Louis Camhi. Louis's new title, he's the founder and CIO of RLH Capital. Louis, how's it going?
Louis Camhi: It's great. Thanks for having me back.
Andrew: Hey, thanks for coming back on. Let me start this podcast the way I do every podcast. First, a disclaimer to remind everyone, nothing on this podcast is investing advice. Please consult a financial advisor, do your own work, not investing advice. Second, with the pitch for you my guest, people can go listen to our first podcast back in August through the Full Pitch.
But since then, some pretty big news, I said new title. You launched a new fund that's focused exclusively on SPACs and maybe this SPAC, but I think, mainly on SPACS. So I just want to congratulate you on launching the new fund.
Louis: Thank you. It's exciting even though I would say SPAC's probably the most hated asset as right now, I just still think there are a lot of opportunities and a lot to be done.
Andrew: Yeah. Hey, I 100% agree with you. Sometimes I post on the blog so much on SPACs that I'll get emails from people that are like, "Hey, that's probably enough on SPACs," and I get it. But I just think these SPACs are super hated right now. I just love the free optionality. We all want to catch the next DWAC, but we'll talk about all that.
Let's start. Maybe, I want to hit three things. Opportunities and SPACs, opportunities in these SPACs, and maybe a quick update on Origin, which was the focus of our last podcast. It probably makes sense to start with the update on Origin. The ticker there is ORGN. I'll remind everyone, smaller-cap company. They're hoping to be EBITDA positive in 2025. They're building out some plans. So please do your own work. There are a lot of risks here. But that out the way, I'll just turn it over to you. What's been going on with origin since our last podcast?
Louis: Sure, so I can't believe it's been over 6 months since our last podcast, time flies.
Andrew: I thought it has been like 2 or 3 in the back of my mind. But yeah, time just flies.
Louis: Yeah, I know. Same. So, I looked up, I was just curious. Like, where's the market? Where's the Origin since we last spoke. Origin's basically flat which is interesting because well, I love the company. If we take a step back and think about the macro, Origin is everything the market doesn't like right now in terms of very early stage, non-revenue-generating, etcetera.
Louis: But unlike a lot of these other SPACs or companies more broadly that haven't executed on their plan, Origin has been executing pretty nicely. I know that's a weird thing to say when there's no revenue but they laid out all their targeted dates when they want to have each step of construction done, and that's farther running ahead. So it's nice to see us back with solid execution.
So just to run through the update, when we spoke it was right after they announced their second-quarter earnings or backlog was 3.5 billion for their pipeline. Now, it's 5.6 billion. So, I don't think anyone who's bullish at least is never questioned the demand but you're seeing a lot of healthy growth. They announced the site for origin, too. More importantly, I think they did an okay job of mentioning that they're now fully funded.
The reason's a little confusing is they received a $400 million dollar allocation of municipal bonds from Louisiana and there's a provision in the 2021 infrastructure and job that states effectively that if you're involved in decarbonization, you can get a multiplier on an allocation for municipal bonds. So that means they're going to be able to finance the entire cost of Origin 2, using tax-exempt bonds which is effectively the second-lowest cost of finance after government bonds.
I think that's a big positive that you've now taken financing risk off the table. The demand is already being played out. There's someone on Twitter who asked this, "I think the initial plan is to build Origin 2 with one train?" My understanding is that the second train can be added at any time.
Andrew: What is the train? What is the difference between the first and the second [crosstalk]?
Louis: Think about it as your capacity, right?
Louis: When they laid out their base case and their upside case was, their upside case was we can build another train in our current location. So, when I spoke to them and I asked that very question, they said, "Look, we can build a second train at any point. So what we're really going to evaluate is does it make sense to build a second train or does it make sense to pull forward construction on Origin 3?
I think that's something we want to be pushing them on over the coming quarters. See what are the pros and cons? What are the timing costs, etcetera? But it sounds like we're going to get that capacity regardless it's just a matter of is it in the wrapper of a train or in the wrapper of another facility? The other thing that I was excited to hear them say is to reiterate their capital budget. Obviously, we see inflation is off the charts.
I'm really curious, these guys are conservative but you got to think with oil prices where they are now that their pricing power is significantly higher because the cost of the incumbent plastic is going to be that much higher.
Louis: Then with respect to timing, they reiterated the timeline but if you go through the investor presentation, they show that the evaporator module was bolted 3 months ahead of schedule and for the piping fabrication 6 months. I think there is some optionality of an upside surprise for Origin 1. At the end of the day, my thesis has nothing to do with whether this comes on at the end of the year or a few months earlier. But positive is good.
When someone asked the question, "Why haven't they revised forward the timeline?" I just looked at this market and think, "They're not going to get any credit." If they said, "Okay, until the end of Q4 we're going to come on at the beginning of Q4." No one's going to care. Heaven forbid, they say, we're coming on at the beginning of Q4 and ends up being the middle of Q4, people are going to hate that. So I think they're being very prudent in their approach.
Andrew: Look, I will just say not an expert on the company but having spent a lot of time looking at SPACs when I was updating for this project, people who are watching on YouTube can probably see me looking at their debt. Like, as I was getting ready for this project podcast, I was really impressed by they do this thing where they show, "Hey, here's where we projected when we did our deal. Here's where we updated kind of bad or analysts there," and whenever, "And here's what we actually achieved." Everything they've said they beat often by several quarters or something that several years. I was just really impressed because anyone who's followed this back road, as we'll probably talk in a second, like, beating schedules and coming in under budget, or on time is not exactly what you see from SPACs. I think that's what you said in the original podcast, right? You were like, "This is a real team. Yes, they're going public to our SPAC, but these are real guys who are really serious."
I also really like that they're going, is it Geismar? Is that Geismar, Louisiana?
Andrew: I'm from New Orleans. I spent a ton of time in Baton Rouge. I was down there just a couple of months ago and Geismar is right between New Orleans and Baton Rouge. I've never been there obviously. It's a very small town but...
Louis: We're going to send you for the site visits then because we [inaudible] [crosstalk]
Andrew: You know what? I'm going back in April for a wedding. So, maybe I'll try and sneak out and take some photos. So you guys will get some photos of me in hard hats.
Louis: Love it.
Andrew: Yup. Anything else we should be talking about Origin?
Louis: Yeah. Just real quick. The idea of Partnerships and Licensing comes up a lot. People ask, I ask them every single time I speak with them. The current plan is to go at it alone. They're saying there probably will be partnerships but you just can't adjust the timeline. It sounds like there are 2 types of potential partnerships. One is for customers who say, "You know what? We need our own plant." We just have such high demand and so they will build a plant. It'll be all theirs and they will pay a royalty licensing component back to Origin.
The other is they'll partner with the chemicals player. I know Dow gets thrown out there a lot. We'll use them as an example. I've no idea of Dows. If it could be Dow, Chevron, or Exxon, whoever. Similarly, like in their efforts to go green and focus on ESG, they'll invest in the cost of the plan and similarly pay a royalty. So, I think those things happen. I have no idea when. Intuitively, it makes sense to me that they happen with Origin 1 launching because I think Origin 1 really derisks the construction risk.
Now, the other thing, 2 other points, people are asking for more disclosure. I've been working at hedge funds for most of my career. I've never gone up to a company I was covering and said, "Give me less." So I think that's normal, we always want more. As you know, Andrew, I'm on the board of a company. We have that same discussion constantly. Once you provide it once, you always have to provide it. I just think that we just have to accept that fact.
Andrew: Let me ask you a quick, so Origin 1, which is it's not as big as Origin 2 but that is their first one under construction. They say it's on time, on a budget, everything. It is supposed to be done by the end of 2022. So you'll get revenue from it from 2023. People can go look at their debts. I'm looking at their March deck on page 43, they even break out. "Hey, here's our next 10 years' projected financials."
In 2023, the revenue starts coming online from Origin 1. Now, there's still going to be EBITDA on everything negative because they've got lots of other costs. But do you think they're going to really give lots of breakdowns on, "Hey, here's how profitable like isolate everything else? Here's how profitable Origin 1 specifically is."
Louis: I don't know factually but I hope so because as an analyst, what you want to see is how do those unit economics compare to the deck? If they're remotely close, I think we're in really good shape. And if they're not, we may not be in. So they know that and I think they want to show. The other thing is when they show those unit economics, it kind of gets the partners talking, right? Potential partners. Like, "Oh, wow, look at those economics, we should be involved here."
So I think there's a lot of reasons for them to do it and because of their IP, they don't have to worry about, "Hey, if we show our unit economics, we'll trigger the next guy to start building plants because they just don't have the know-how.
Andrew: Let me ask one more question. This is no off-the-cuff. There's the old thing like a lawyer never asked a question, he doesn't know the answer too. Well, the podcast says, "Those ask a question he doesn't know answers to." But I think back to when we were talking in October, a lot of people were excited about Origin when they would look at DNMR scientific, DNMR. And I know they're not the same obviously, but DNMR at the time we were talking, was trading at like 15 or 20 or something, right?
Andrew: And that had come down from a peak of almost 50. As you and I are talking today, the stock is under 5. Again, lots of differences between the two companies. But if there are similarities, I would look at the DNMR price and say like, "Okay, yes, that company is not executing Origin's executing. But does the DNMR price give you worries that, "Hey, maybe there's not the pot of gold at the end of the rainbow for Origin, just based on kind of how DNMR has been acting?"
Because, Origin right now, they raised a lot of money. They're training for a little bit above the value of their cash, but not much. Maybe that's Dow. Maybe it's people saying, "There's not a pot of gold once these get built."
Louis: Well, I honestly don't view Origin as having cash, right? Because even though it's on their balance sheet, it's all committed. So, like when I think about valuation, I think about, let's pretend they spend the cash, let's pretend they have the debt on their books from this facility. So in my mind, even though they're net cash they're really not that. I know that makes no sense, but hopefully, that [crosstalk].
Andrew: I 100% get you.
Louis: I don't know DNMR that well, but they decided to go do an acquisition. As a result of that acquisition, they no longer had the cash to finance their facility. So, it's a tough time for companies like this. They were forced to raise or convert, and then you have to convert, our guys come in like, I know, David Einhorn in his letter, he's still bullish to DNMR but he said like, "We were surprised about this convert so we dumped our common and bolt to convert. It was the better security."
I'm not looking to than that. These companies are all hit. You need to execute. The nice thing for Origin, which I think we're 60% which would be like a bull case for SPAC today. But because of high redemption for them, people were worried that they wouldn't have enough capital to finance Origin 2. They now announce that risk is off the table. The hard thing is when people say, "What gets to stock up?
I think it's 2 things. One, I think our catalysts as Origin 1, and two, we're just more macro-oriented. Origin is not going to massively outperform in a market like this that does not like, let's call it VC stage complex.
Louis: I do like that Origin insiders have been buying fairly aggressively. No insiders sell, all insiders buy. Boone whose SPAC-sponsored plans on buying quarterly and he's been doing so. So people are definitely putting their money where their mouths are.
Andrew: Yep and the buying started at $5 to $6 dollars and now we're talking it's approaching 5$. So they've been buying higher than current prices.
Andrew: Anything else you want to update on Origin or should we turn it over to the SPAC market?
Louis: Let's go SPACs.
Andrew: Great. Well, look, I think you actually said something in there that is a nice transition to SPAC. So just you said Origin at the time they did the deal, there were 60% redemptions and people were like, "Oh my God, what an awful disaster." Today, I think there'd be a lot of SPACs who would be shooting fireworks into the air if they only had 60% redemptions. We're seeing some SPACs that are like 99.5% redemptions or something.
Louis: The average redemption rate in February was 88%.
Andrew: It's incredible. The way SPACs are trading after the deals go through, I don't know why you wouldn't redeem but it is interesting. I'll just give some brief overview back in last like January through March when SPACs were super hot and I'm looking at SVFA as just one example. That is SoftBank's first SPAC. The stock price was $11 per share, no deal, $10 in Trust. But a buzzy-sponsored SoftBank stock price is $11 per share and it's all anyone who wanted to talk about with me, right?
Andrew: And today, SVFA is 978 per share. Guess what? They've got less than a year to find a deal or else they'll liquidate. So you're getting a 2% plus cash yield. And if they announced a great deal, the stock could go to infinity. No one wants to talk about it, no one wants to touch it, and that's just one example. Please do your own work, do your own thoughts. But it's just one example of, just nobody wants to talk about SPACs. I just see this great opportunity. I want to also review, what are you thinking about pre-deal SPACs where you have seen opportunities, how are you thinking about the market right now?
Louis: Sure. Well, first and foremost, I want to say that the Twitter SPAC Community is really fantastic. So we should start there. There are tons of resources for anyone who's watching this and isn't as familiar, you hashtag SPAC and you will find a lot of content from the smart people.
Listen, going to your point, at one point last year, the average pre-announced SPAC was $11, and post announced $14. I remember looking at this and saying it's kind of amazing the markets telling, you pay 10% premium for cash and that will go to a 40% premium. And that's a lot of money and it's all great until it's not. Right now, the majority of SPACs pre-announced Riposte answered our trading sub 10. So to your point, it's turned into a fixed income type product.
Like when I describe some of the SPAC averages that I do in the fund, I call it fixed income plus-plus. In your case, the average yield right now is about 2.8%. And it's interesting, if you think about you're buying, something that it has a 2.8% yield of SPAC by treasuries in the J.P. Morgan account. So why people are buying treasuries yielding 60 basis points and not SPACs? I'm not sure and I'm actually having that very conversation with a couple of corporate because they have big treasury operations and it makes no sense to me.
But now, you're actually getting paid optionality. This is a cost of capital question. You may say, making 2.8% is not what I want to do, but it's 2.8% plus, and in a lot of cases, you can buy the units for under Trust Value, in which case you're earning a little bit of a cash yield and you retain all this upside optionality. We should talk about warrant prices in a little bit but warrant prices are so low right now that when you have a good shot at making mid to high single-digit returns with no risk.
Andrew: Can I just say, before we talk more because I do want to talk more because you and I view them a little bit differently. On the plus, my background with investors I've talked to recently is everyone dismisses the plus, all right? They say, "Oh the days of February 2021 are over, SPAC pops above 10 when they announced a deal and it does feel accurate right now. But I just keep pointing to them. Look back to October. DWAC, which is the SPAC that's merging with Trump's SPAC, the day before they announced the merger is trading under trust value.
As you and I are speaking, it's trading at almost $100 per share, right? That's a 10x on what was relatively before the deal. Buying under Trust is a relatively riskless position. Now, obviously, not everything's going to... I wish I don't have a position at DWAC, I wish I did. Not everything's going to do that but it only takes one for that to at for your basket of Treasury Securities that you bought at a 2% yield, all of sudden to yield 8% or something. Right?
So I think people are so dismissive of that risk, and I think there's going to be a couple of smart sponsors that find a deal that causes a pop. Getting better than cash returns with that upset optionality, I think people are very dismissive of it and I'm still not 100% sure why.
Louis: Well, let's also just look at the last deal of that price. I don't know anything about the sponsor. I'm not involved. It's called Shuaa Partners, S-H-U-A-A. SHUAU is the ticker. And just IPO it's trading at 999. It is 1025 in Trust and offers half of the warranty. So you could sit there by that paper knowing, the worst-case scenario you make 2.5%.
Louis: That's the case, you know that warrant is worth something and it's more or right now warranty trading at about 35 cents average, give or take. So let's just assume as soon as it starts trading, you sell that. So your 2.5% plus your 3.5%, you've made 6% with no risk. To me, that's a fantastic return now.
I tell people and investing in SPACs if you think this was before kind of the carnage of the last few months. If you think and as I said you go up 30% a year, this price isn't the best trade for you. But if you don't, I think the risk-reward here is great.
Andrew: Just on SHUAA. I just put up the S1 as you were talking in. Look, it's not just you're buying at... let's just call it 10 to make you're buying the units, which include a warrant at 10, these guys have 15 months to do a deal, or else they're going to return 1025. So 2.5% for 15 months. I mean, I think 10-year treasuries yield 2.5%. So you're getting that great optionality there and if they announced a deal the warrant will have some value. I just think it's a fantastic combo and I'm with you.
For pre-IPO SPACs, every time somebody asked me, "What's your best idea right now?" I say, "Honestly, it's probably Pershing Square Tontine" Which I know everybody's burnt out on that but you're buying it 1% below Trust. They've got less than a year until they need to liquidate that thing, so you get 1%. And if they announced a deal, they think you go parabolic and you get the Tontine warrants and everything in there like risk. I get that it's not as high upside as a lot of other things people talk about, but risk-adjusted. It seems tough to beat.
Louis: I completely agree. So what we're talking about right now is kind of that safer end of the SPAC risk Spectrum, which is where right now, I mostly play as a fund but there are just tons of these opportunities where if all goes wrong-- Sorry?
Andrew: On the safer end, are you more focused on... So SHUAA, right? If your IPOed in February 2021, because the IPO market was so hot, you got great terms, right? Ten dollars in Trust, very low warrants...
Louis: Twenty-four months, yeah.
Andrew: ... (24 months and all this. And then you just mentioned, sure, right? Which was 1025 in Trust. I don't know the warrants, it's probably, half over 1025 potentially on the Trust. At 1025 in Trust 15 months. If they want to extend, they've got to put extra cash in Trust. So are you more focused on the SPACs from yesteryear that is often trading 975 less than a year to go? Or are you more focused on the SPACs that are IPO today that are often treated in 1025 in Trust but really tight terms? Does that make sense?
Louis: Yeah, it's a little bit of both. And the way I think about it is, for me, it's first sponsor quality and then some underwriter quality and then the terms. So, I've always said when I was picking stocks, I'd rather have my list of, this is what I want to buy but it's too expensive. So I'll wait and I'll have that work done. Just similarly, I know this sounds kind of silly but I have price targets on these SPACs where I assume I'm going to get my Trust Value back. I have a framework for what I think the warrant could be worth and so it's simply as my downside case is getting Trust back. My upside case is getting Trust plus some value for the warrant. I'll run that sort and then, see okay, I'll put the names I'm interested in that's anything show up as being attractively priced. And the other is...
Andrew: What are some? Oh, go ahead, please.
Louis: ... one of the other things is the liquidity here isn't great. So when you make your buy, you should be prepared to then sit with it.
Andrew: Yep, 100%. Hey, you mentioned your focus on top-tier sponsors a little bit underwriting quality. If you can, what are some previous SPACs that you are interested in or taking up? Do you think listeners should maybe go take an eye out if they're looking to pull some cash?
Louis: Sure. At the risk of what you're talking my own book. So full disclosure...
Andrew: When I said listeners, I'm more meant, what are some pre-deal SPACS I can go and kind of purchase that one. [crosstalk]
Louis: There's this SPAC called H.I.G. Acquisition Corp., and why I think it's interesting is, H.I.G. is a stand-alone Private Equity Firm.
Louis: So, unlike a lot of the SPACs that came to be because it was an executive or just a group of smart guys. This is a firm that one, it does deals for a living. Two, it has access to financing in LPs. And three, it has a pretty darn good track record. It's interesting because guys like this in the public markets, in the stock market, they don't have a KKR type of name but if you kind of does your research, you find out like this is a very good middle-market Private Equity Firm.
So, you look at this and you can buy. The common rate of the units right now, you could buy for 995 knowing you're getting $10 back in the third of the warrant. In this case, also, I would say, you can split it to as common trading at a really high yield or the warrant really cheap. In this case, the warrants are really cheap. So the safe way to do it is to buy the unit. The riskier way would be to buy the warrant outright. But you can [inaudible] a lot at a pretty healthy return if they do a deal and I would just assume that they would as a firm that does this on a day-to-day basis with access to capital.
Andrew: I want to ask about the warrants in a second because I know you and I might have a little bit different views and talk about the I think we're going to see a way of SPAC liquidation so we can wrap it all that. But I did have one question, I've just been thinking in the back of my mind that I thought you might be a good person to talk about.
So, these two recent SPACS, Black Rifle Coffee, which trades now under BRCC, and System1, which trades under SST, both of these merged recently. Both of them are typical for the SPAC Market heading into the merger. We're trading right around Trust, big redemptions for both of them. And now, both of them are trading way above what the Trust was, right? Trust is gone. So you can forget about that.
Andrew: But shareholders had the option. "Hey, do I want to own stock in this company, or do I want to redeem it for 10? The vast majority of people in both cases chose 10. And guess what? That proved wrong because here we are a couple of months later, System1's trading at about 1350, Black Rifle Coffee's trading at about 1750. So I wanted to ask you, do you read anything into that? Or do you think it's just, "Hey, we have seen one SPACs at huge redemptions often they just become trading sardines where people are flipping a really low float?
It's like System1, Black Rifle, a couple of others like, do you read anything into it where hey, good deals that are undervalued there's a lot of potential upsides? Or is it more, hey, check-in and six months because he's got a lot of redemptions they might just be there are options out and people are just trading around?
Louis: I think it's the latter. So let's start with System1. System1 had 99% redemptions.
Louis: And so, the float right now is just so tiny. I always say the warrants don't lie. The warrants right now are trading at $37, which implies a high single-digit stock price. They file the S1 for the warrants already. I would venture to say as soon those warrant from exercisable, you'll see the common come under pressure.
Andrew: Louis, do you want to pause for a second? You can see this with a lot of companies. So, DWCA, again the Trump SPAC trades at 97, and the DWACW warrants trade for way below that implied price. But do you want to pause for a second and just explain to listeners who aren't super familiar, why the warrant pricing might be out of line with the stock and why that might imply the stocks going a lot lower?
Louis: Sure. So you would look at the warrant of the DWAC and you say, well there's a huge arbitrage opportunity here because I can create the common buying the warrants for much less than just buying the common outright. The problem is...
Andrew: Just to give people the math there. So DWAC warrants, the last I looked traded for like $23 per share right now. The warrant lets you buy the stock for 1150. So that would imply the stock is worth about 35. DWAC trades 495. So there's a 60 dollar per share are up there just to explain what Louis is talking about there.
Louis: That's exactly right. So you would say, "Okay. So what I'm going to do is I'm going to buy the warrants and I'm going to short the stock." The problem is, right now, I'm checking if you want to short the stock, it will cost you 117%. Since you don't know the timing or anything, it's just not an actionable trade because you can't collapse the warrant and you're going to pay a huge cost for it.
Andrew: Yep. As Louis mentioned, it's because the warrants aren't registered, it normally takes some time. Once the warrants are registered, then you could actually exercise the warrants and collapse the spread but the market is saying, "Hey, once the spread collapses, the stocks are going down." So, I'll just pause here to remind everyone, we're on an arbitrage shorting, very risky. Please, please, please, I basically avoid turning at this point, please do your own work and consider that. Anything you want to talk about?
Louis: On SST, the only difference, so warrants are exercisable on the later of one-year post IPO. For 30 days post the deal but an act of S1 needs to be filed. For SST, the IPO is in June 2020. So we're much past a year and the deal closed at the end of January. So we're now past the 30-day marker and so it's all about having an effect of S1.
Louis: They filed their initial S1, when that goes effective, is up to the SEC usually within 2 weeks. But if that's right within 2 weeks, those warrants become exercisable, and that arbitrage trade if you will, will collapse. This means either the warrant should trade up or the common to trade down. Historically, it's the latter that happens.
Andrew: Yep. Perfect. Let's use that to transition to pre-deal SPAC warrants. I'll let you explain the thesis but I know a lot of people who make a really good argument, pre-deal SPAC warrants have been just so tossed out of the water. They're such cheap optionality. They represent a really interesting opportunity. Why don't you give that thesis, not a review? I've kind of had a different viewpoint so I can push back a little bit. But why don't you start by laying that out?
Louis: Sure. So, when I started investing in SPAC warrants. The previous SPAC warrants were in 2015, and they were 40 cents. So up until now, you would always hear those remember when stories, like "You remember when we bought the Capital acquisition warrants at 40 cents and they wanted to..." "That was just amazing." Or, "We bought the Trinity warrant at 40 cents and they end up taken out for..." There were so many examples and obviously, you never buy enough in hindsight. Now, the difference is back then, there were much fewer SPACs but at the same time, no one knew what SPAC was.
Louis: So the ability of the deal done was similarly as challenging. You fast forward now, and it's... Okay. So we're actually getting back there where I think I just saw before I hopped on the median pre-announced back is 36 cents. So we're back to those levels even a little lower. But I think it's really important when you dig in and start segmenting what sort of SPAC you have? Who is the sponsor team? Who is the underwriter?
For me, it's thinking about do you have proprietary access to deal flow? Do you have access to financing whether that's in that market or equity markets? Are people going to trust in you to do a deal? You can take the extreme. The Gores franchise that's on their 9th SPAC, they're probably going to do a deal. Just my belief.
When you look at kind of the KKRs of the world who have a SPAC, the A-Rod is a huge private equity firm. I think they're going to get deals done. But Barry Sternlicht complex, they've dedicated a lot of resources as fast. I think those guys, they've dedicated resources. They have their own capital so they can step up to these deals. They have access to deal flow and other capital through their core business operations. I think those guys get deals done. So, I'd rather pay up for quality here, whereas, just saying, I used to look at a list years ago. It's like, what are the cheapest warrants?
I think if you do that, you get yourself in trouble. Again, I have nothing negative about these specific sponsors, but there is a host of warrants right now trading below 20 cents. Like you and I can sit here and say, "That is so cheap." But it's cheap for a reason. Don't get me wrong, some of them can get deals done, and those will be great pieces of paper but when I think about "Where is the risk of liquidation?" The market is telling you, it's in this list.
As I flipped through it right now in real-time, I don't see any names that I recognize either as a private Equity Firm, a hedge fund, or just a prominent financial institution. Similarly, I don't think it's a surprise, you look at the underwriters. You're not seeing like a Goldman Sachs under its back on this list which I think tells you that people have more faith that, if you did your deal with Goldman, Goldman has a big M&A operation. They're going to find something to shove down your SPAC. It may not be a great deal, may not be a good deal at all. But you'll get that announcement.
Andrew: So let me just give a slight push SPAC stat. So I definitely hear that and I agree, there's opportunity. I know people who run Monte Carlo models and say, "Look at 40 cents, these things are buying." I was laughing when you were saying back in the 2015 days because I've got a friend whose ex-Citadel as I know you are. When I talked to him, he's always talking about...
Louis: I was, you cannot tell that to anyone.
Andrew: ... totally, the same deals and same warrants that you talk about. So I was just kind of laughing there. So I hear all that. But I do worry like they're just so many SPACs out there. That even with somebody sponsors, we're going to see waves of deal failures and SPAC liquidations. Even with Buzzy sponsors, this is out there but like ATIP which was backed... I think that was Fortress.
Louis: Fortress, yeah.
Andrew: Fortress took on private. I know me and a couple of other people took it back because we're like, "Oh, this is physical therapy, contracted out and then that company, I mean, they're probably going to file or have to restructure or something and the stock goes from 10 to 2. I'm worried like, you buy these warrants at 40 cents, thinking, "Hey, these are good SPAC sponsors that will announce the deal. I worry the liquidations are going to come in a little higher than you think and then every SPAC deal that gets done is going to go from 10 to 6.
So you break even on the warrants that you do buy and you lose money that you get deals through and you lose money on the ones that liquidate. So all laying your like break even or lose a little and drop opportunity cost is just awful. Does that make sense?
Louis: Sure, but I'll push back a little bit. So, a $6 stock usually has a warrant that runs a dollar. So your real risk is exactly what you said. If you're buying these, pick your number, 40 cents. I'm buying mine a little bit higher because I'm skewing for quality. There's a big question if these smart sponsors can figure out what the market wants right now? Right?
Louis: Then if you take a step back, as much as we're all pretty sick of talking about Nikola, right? Nikola was the first Biggie SPAC. If you were paying attention, you saw it go from 10 to 80. So, every other sponsor they'd like, "Okay. This is what the market wants." They want something conceptual, something if you address it, they don't care that there's no [unintelligible] and so, they did all these EV deals and that worked at a time. I think this project finished really smart. So it would be unrealistic for them to say, "You know what? The market wants cash-flowing companies, with some growth and a reasonable valuation. So can we figure out a way to do a deal that sticks at 10 or I joke around?"
If a sponsor can do a deal that only destroys 20% of value. So, 8 bucks, the warrants are worth a dollar 70. If you're buying them at 50 cents, that's a triple. So now we get into okay, well, what's your liquidation rate? Because obviously at zero and we'll find out, but my view is that it's lower for these higher-quality sponsors and it's probably higher for lower-quality sponsors. Some of the sponsors that are going out now and doing a one-year term, full warrant overfunded trust, looks great to the IPO investor, but it just makes it that much harder to do a deal.
Andrew: Makes so sense. So you mentioned Gores, a lot of the private equity sponsors. Any under-the-radar sponsors that you think the markets discounting a little bit that you think are interesting?
Louis: So, I mentioned H.I.G. just because of the same setup. Another one is would be like One Equity Partners. One Equity Partners was the old Merchant Bank of JPMorgan.
Louis: So similarly, you know private Equity Firm. I've got a lot of them on my list. The question is, "Are the returns high enough for me?" Like I'm waiting for better prices, but there's the TPG. Well, Social Capital to me is not interesting with the common above 10, but you had your window a couple of weeks ago where dropped below. So kind of my case in point of putting these on your watch list. If you could buy something like that under 10 like of church...
Andrew: A few minutes ago, I had mentioned SoftBank SPAC which is trading at 980. If we had talked a few weeks ago, I would have used IPOD & IPOF because both of them were below 10 and I would have said, "Look, every SHUAA SPAC has traded above 10 at some point. Like you've got the optionality to buy it at 990 yet, liquidates or it's an awful deal. Okay, you made 1% and your opportunity cost wasn't that great, but IPOF here we are. It's gone from 992 to 1035 and you keep hearing whispers from the internet people, "Hey, maybe, he's going to take SpaceX public."
Louis: Yeah. And some other ones like [inaudible], equity distribution acquisition (EQD), that's Sam Zell. Like when you think about the ability to finance he can write the pipe from his back pocket. He's pretty got it set, cash in like lost in his couch. Another one, I know these guys I think they're really good investors, it is a firm called Corsair. Of course, they are partnering Corp., CORS is the ticker. The same thing, they are a financially oriented private Equity Firm. Again, the same pillars of, they do deals for a living, they have LPs, they have access to capital, etcetera.
So, I just think that the odds of them doing a deal are probably higher than not and because people don't know who Corsair is because again, it's not a name you would know if you're just a public markets investor, the warrant trade is cheap which makes the units are cheap.
Andrew: Yep. Let's see. Anything else we should be talking about with pre-deals SPACs? I wanted to mention these SPACS quickly if that works, but anything else on pre-deals SPACs?
Louis: I don't think so. We can talk about some... I mean a lot of people talking are about CND in a circle which we can talk about a little bit if you'd like. Otherwise, we can definitely get into some deals SPACs and I can check. I am not so sure here at the conversation that I am having with SPAC sponsors on how to navigate this choppy market.
Andrew: Yeah. Let's talk CND Circle. I actually have had a few friends who were pinging me on it several months ago, saying, Hey, you should take a look, Circle's going crazy." I don't think I've ever seen a SPAC restrike their deal at a higher valuation. So I'll stop rambling. I'll let you kind of tell the story and why it's so interesting.
Louis: I thought it was really interesting, too. I've done calls to the company. My background is in covering financials and Fintech and this was kind of a nice intersection. Even though to be totally clear, a lot of the crypto stuff is way over my head but this was pretty straightforward. It reminded me a lot of a Trust Bank, very rate sensitive. You know what I liked about it as you dug in is they assumed no interest rate hikes in the forecast. So you knew there were a lot of upsides and you could track the USDC issuance and you can see that there was upside to the plan.
So that got me really excited that you were going to have s SPAC raised numbers because we've talked about that's not so common. And so what was interesting is the common was trading at 1050, which as you know is very good for a SPAC these days. But it's also saying it's a way to say the market thinks this asset is worth 5% more than the deals cut out.
Louis: Yet, they come in and double the valuation. So I was pretty frustrated again. I spoke to the guys at Circle, I have a lot of respect for them. They felt like they were in a good negotiating position. They had to recut the deal because their timeline with the SPAC was expiring and they apparently just held all the cards. But if you think about it now, they get this nice valuation on paper. They lost the pipe. The stock is now trading below Trust.
So, it's back in the hands of the arms from the fundamental guys and the setup now just feels like they're going to face high redemptions, and they prior to needing to raise a pipe. So, the question for them will be what term do they raise a pipe? Can they raise it better terms and before even if it's at a discount to the SPAC price? But you take a story that I think was really primed to explode it from a stock standpoint and you make it a lot more challenging. It's one of those businesses and the stock are different. The business is still fine and dandy but could be harder for the stock.
The other thing they did was they updated their forecast to include the interest rate curve, the forward futures curve, which, obviously, unbeknownst to them, this whole Ukraine issue happened. A lot of global volatility is in turmoil, and now the futures curve is coming down and so, all of a sudden you went from, this is a sure thing beaten raised to now, like, is there a risk? I don't know. It just gets a lot harder.
Louis: So we'll see how it plans out.
Andrew: Correct me if I'm wrong, Circle CND took a really long time for them to get their deal done and that's part of the reason why they had to restrike everything. I've seen FTCV which if I remember [crosstalk] is merging with Etoro.
Andrew: And FPAC, which I think is really interesting optionality is merging with [crosstalk] Bullish.
Andrew: Both of them have taken way, way longer than I would have suspected to get their deals done. They're different, right, but all of them loosely touch on crypto. I'm wondering if the SEC is just having big pushback on SPACs that touches on crypto. Do you think I'm reading too much into stock?
Louis: No, I think you're exactly right. I've spoken to all 3 of those teams because I've noticed the same thing and they just said "Look, we're working with the SEC, were giving them whatever they need. The SEC apparently hired some crypto guys a couple of months back." So they're educating themselves as well. But FTCV to deal was announced on March 2021, and here we are a year later.
I've asked the CND guys, "What do you think your deal closes?" They'll all say, "We don't know. We're ready to close now but we're just waiting on the SEC and FPAC Bullish. They'll say the same thing." So, everyone's working really hard. Listen, there's another SPAC, its entry called Queen's Gambit, GMBT. I flag that one for two reasons. One, they've already beaten numbers before pre-deals SPAC and I think that's pretty interesting. But two, they filed and amended f4 last night. It's their fifth draft. And if you do a Redline comparison, there are four changes.
As far as I'm concerned, and as an investor all immaterial. So the SEC is clearly harping on all SPACs and I would say it's a fair read that crypto even a little bit more.
Andrew: Is Queen's Gambit touching SPAC? I don't know who they're merging with. Does their merger touch SPACs? Or are you just using that as a general [unintelligible]?
Louis: You mean crypto or?
Andrew: Oh, yes. Sorry.
Louis: It's effectively a rideshare app.
Louis: Do you remember GVs Via?
Andrew: Yes, I do remember Via.
Louis: So it's like Via but internationally in the Middle East and whatnot. The unit economics are really interesting because unlike Uber where it's like one driver one passenger. They're the drivers that fixed cost and as you drive usage you actually grow your margins. I fly that one because you get my attention if you beat earnings and raised before he dies back because again, this has really happened and they've been able to accomplish that. So I've been trying to understand this back process and when they filed last night, you know, first I saw and learn I was like, "Great. They're going to get their date and go effective and they didn't. But you start flipping through and try to understand what the SCC folk did and you come always scratching your head, "Why are you stopping a deal for...?
Andrew: I was laughing when you said they were merging with an international Via because
if you look at the stock price of Uber, or Lyft, or any of the international Uber have left. I think we [inaudible] [laughs] once that goes through.
Louis: Very well could be the difference seems to be that they're so far beating. You look at something like a Grab. Grab really sucks for someone who likes this back world as a whole because it's a quality sponsor, they structure the alignment so it´s well aligned and obviously still, you know, a poor result. I'm not that close to it so I can tell you what is macro versus over-aggressive but it's exactly right. These things have gotten hit. But again, I think the solution for a lot of this back issue is back to come out and beat raised numbers. It's really that simple. I was speaking to a sponsor this week and I said, "Whatever numbers you ultimately go out, with for whatever asset you buy, I would seriously consider cutting them by 10%, having a fight that the valuation is not as cheap but then like during your DS[?] back you being raised a little and you're being raised and you're like all these other beating ray stories that we've seen.
But I think, there's no way to prove this bull... There is a way, they've all missed. I think a lot of these facts came out in the early '21 and leading to 2021, they had to put out these really aggressive forecasts to justify the valuations and get the deals done. This is probably a good segue. I know you want to talk about these facts. When you report Q4 21 and give your 2022 guy, that really could be declaring event because you've taken your pain, you've divorced yourselves from these ridiculous forecasts that you originally put out and now you may finally have level set expectations to beat and raise and just because you didn't like a stock at 10 doesn't mean you don't have to like it at 4.
Andrew: Yep. No. I'm with you. It's just such a tough balancing act for the stock there, right? Because if you lower the numbers too much the [inaudible] is going to look at you and be like, "Oh, I'm not interested in this back on the announcement because the valuation is too high." And then you beat... It's just a tough game... [crosstalk]
Louis: They're not interested anyway. Let's be fair right now.
Andrew: Sure. Sure.
Louis: But again, you look at deals like [inaudible] Robin's, right? I know that's a high-profile one that people talk about and you've got an asset at a reasonable price, very evened out positive, very free cash flow positive and you're able to look at something like that and say if you do your work and you get comfortable, even if I really like this business and there's volatility around the dish back, they're generating cash, it's real, it's not a concept so, does that mean you should put your entire portfolio into it? Absolutely not. But does that make it easier to own versus some of these other stories? I absolutely think so.
We should talk about... And full disclosure I'm long CRA issue common and warrants. We should talk about that also because one of the questions that showed up on Twitter was about some of these non-redemption incentives that sponsors are starting to offer.
Andrew: Let's let's wrap the conversation up there. I think that's a good place to stop. So a lot of sponsors... I can't remember who the first one was but we've seen it increasingly where they'll do... It's similar to talk team structure, right? "Hey, if you own shares and you don't redeem, basically, we've set aside a pool of shares."
Andrew: And for every shareholder who doesn't redeem, you'll get one. So if no one redeems, everyone gets 0.1 extra shares, but if half of the people redeem then everyone gets 0.5 extra shares. So it gets up and it really encourages. I've seen that structure so far. I mean, it's been limited. I don't think it's been that successful and discouraging redemption because everybody's been looking at these things and saying, "If the stocks going10 to 6, it doesn't matter if I redeem an extra...
Andrew: What do you think about them? Do you think these are clever? Do you think we'll start seeing more of them? Have you seen them work so far?
Louis: We haven't really seen them work but small sample size. There's a deal coming up for both...
Louis: Story. Exactly. Some have it. The way I think about it is you're not being compensated enough if you're like an ARB[?] who is not fundamental to say, "Oh, you're giving me like an extra 0.1." Let's say 0.1 shares, right? A dollar of consideration. So sure I'll stick around because you look and there are just too many of these things trading that drops immediately.
The 7, 6, 5, 4, 3. So I view it as a sweetener if you like the deal. So again in the Conn[?] Robbins case where I like the deal and I like the cash flow characteristics. Sure. If you're going to give me a little extra juice. That sounds good." By the way, the warrants that restrike, too. So I'm going to get more value in my warrants and that's great. If the forecast is close to right... Even if it trades on a little bit, the thing is in a compound value. In my opinion, for these cash regenerating stories, a warrant is just a cheap form of leverage on your cash flow compound. So, in the case of CRHC, a highly profitable business at a reasonable price. So if you like it before the story, then the 6.6 million shares are allocating to [inaudible] of bonus and the warrants being restocked is also a bonus. But it all starts from liking the business and then when you look at Starry. Starry said, "I'm not in the lead, but it sounds like an interesting business could mission to bring cheap internet everywhere.
But I looked at it and say, "Okay, this business is free cash from negative to the tune of about $350 million over the next 3 years based on their forecasts. That's just not the type of stock that works in this environment, right? As we've seen with people from Origin. So what? Even if the private investors are impressive, you have Tiger, they've got Fidelity but I look at that and say, "You know what? I'm not quite sold on the story here and so offering me the million shares that they're offering to non-redeeming shareholders isn't going to change my mind or get me excited to play." But it would have if I was interested, to begin with.
Andrew: I'll just mention for listeners. I just did a deep dive in the cable space and on the blog one of the things I did was I talked about Starry because I think Starry has a really interesting model. If you look at the projections, if you look at their model, it's very scary as a cable investor as a potential but I think Starry runs in some issues where they don't actually own... What they're doing is they're basically leveraging someone else's last mile to go offer internet. Someone and they've got a really novel way but I think there's a lot of questions around that where they don't know the infrastructure. They're the only ones who are trying to do this which should suggest that a lot of other people have some concerns with how [inaudible] is structured but it is a really interesting model. As you said some very smart guys are backing a pipe that is a pretty interesting valuation, right? Actual last question then I'm going to let you go.
Louis: All right.
Andrew: There are a couple of specs that have rights outstanding right? So rights are kind of similar to warrants where if the deal gets done, the rights slip into a stock. The 2 I'm particularly thinking of are Benne, B-E-N-E. ESSC is the other one. I can't remember what the specs name is. Or are you familiar with either of these?
Louise: I know Benne because I think it's a Patrick Orlando's back. Is that right?
Andrew: Yes. Yeah.
Louis: And ESSC seems to get a lot of the red attention because it's gotten very low flow. But listen, I think rights in general are... I just had the data point up on where they were ...[crosstalk]
Andrew: Let's go to the rights thing in a second. These 2, in particular, I was going to ask because these stocks are around $10 per share and the right switch for both of them. 1/10 of a right becomes a whole share. So, the rights are at about 40 cents. So that implies a stock price of $4. My question to you is going to be, similar to the warrants, are the rights forecasting to stocks going straight down if the deals got approved, or are they forecasting to, "Hey, there's a big chance that the SEC blocks, these deals or the deals fall apart because if these facts can get a deal through, rights are worth to zero. So how would you read into this rights price these days?
Louis: I mean can the answer be yes to both?
Andrew: It can be.
Louis: Right now the median rights for a pre-announcements back is 2 bucks. Normalized pretend so it's implying a 2-dollar stock price. Your point is exactly right. This either means that a lot of them are going to liquidate, or it means that the stocks are going to tank. I think from the perspective of doing a deal if they're only rights and no warrants to some extent, that could be easier, right? Because at times they look at it as delusion and so I think it's hard. What I like more about warrants is you get more of that upside but on a situational basis, the rights could be interesting. So I'll be specific. There's a SPAC called ROC Energy.
Louis: So these guys went out, they did their IPO, no warrants, but they did a right. The reason they did that is they said, "Look, we want to buy an energy asset that pays a big dividend, and as you may or may not know if you pay a dividend over 50 cents it restrikes the warrant.
Andrew: And we've seen a lot of SPACs with warrants have to come out and amend the warrants because of exactly that issue.
Louis: Yeah. So they said, "Well, we want to get ahead of that and so no warrant just a right.
I actually think that's an interesting structure and by the way, Energy could be an interesting asset class for his back right now, since Energy has been out of vogue for years, and all of a sudden it's... [crosstalk]
Andrew: Very in vogue now.
Louis: So I actually think that... And full disclosure. I own those units. Actually, that one could be interesting but there are a lot of other ones where they're issuing rights because they have to keep giving goodies to investors. So, you look at some of these deals that have overfunded trust plus warrants, plus rights. There was an interesting deal that actually showed alignment. I know we're over here. So I'm going to try to find this fast for you. But there's this SPAC with the ticker BLEU. What they did here is they issued rights so they wouldn't have to over-fund the trust which could have just been a capital issue for the sponsor.
Louis: Well, what the sponsor did to offset that is they temporarily forfeited some of their promote unless the stock is above whatever the number is 1250, 15 bucks. So, if you're an investor or the target company, you know that there's no incremental delusion here unless the stock is up 25% plus, and then candidly no one cares.
Louis: So if they're creative structures like that, I think that's okay but in a lot of the other cases, it just feels like right or kind of last in the line of goodies too sweet and IPO so you should be careful. But if it's only rights, it's okay. If it's not only rights, you could be wrong.
Andrew: Perfect. Louis, I think we covered so much on this podcast. It's great having you on. Congratulations on your launch.
Louis: Thank you.
Andrew: Hopefully a couple of months from now, we can come to an update on Origin. They'll be close to getting plant one online. We can do an update on the stock market and hopefully, things are a little more lively than they are today. It's great having you on, congrats on your launch and we'll talk soon.
Louis: Thanks, Andrew. I appreciate the time. Take care.