Structural issues hindering SPACs’ growth in Malaysia

It is this cashback option that creates arbitrage opportunities for investors looking to buy into SPACs at a discount, says analyst

By MARK RAO / Pic By TMR File

The success of special-purpose acquisition companies (SPACs) in Malaysia can be undermined by arbitraging and other structural issues, creating a need to reassess the market structure in support of them.

SPACs, otherwise referred to as targeted acquisition companies, raise funds via an initial public offering (IPO) to purchase an asset — a process referred to as a qualifying acquisition (QA).

SPACs trading on Bursa Malaysia Securities Bhd have to complete this QA, which requires the approval of at least 75% of the shareholders within three years of its listing date, or be delisted from the market.

On top of this, 90% of the proceeds raised by a SPAC from the IPO are required to be put into an interest bearing trust account, which dissenting shareholders are entitled to a portion of it if voting against the QA.

Affin Hwang Investment Bank Bhd senior director and head of equity capital markets Arvin Chia said it is this cashback option, while protecting minority shareholders, that creates arbitrage opportunities for investors looking to buy into SPACs at a discount.

“The share price of a SPAC tends to fall after the IPO launch, so if an investor were to buy into the market at say a 10% discount, they could opt to vote against the QA just to capitalise on the cashback, as well as the accumulated interest,” he told The Malaysian Reserve (TMR).

“With 90% of IPO proceeds going into an interest bearing account and assuming a 3.5% to 4% annual interest spread over three years, an investor could see a cumulative interest of 10% or more in returns.”

As part of Bursa Malaysia’s listing requirements of SPACs, shareholders who vote against the QA are entitled to receive a sum equivalent to and proportional to the amount held in the trust account plus the interest accrued, in exchange for their securities.

This is contingent on the QA being approved and completed within the three-year time frame.

Chia said the opportunity to arbitrage in this scenario often prevents a SPAC from completing its QA especially with the high 75% approval threshold, while the transparency of the company’s funds makes it difficult to buy an asset at a reasonable valuation.

“SPACs have a more transparent structure when compared to other buyers in the market and sellers know this, so the bargaining power is vested in the latter,” he said.

The QA, according to market requirements, must have an aggregate fair market value equal to at least 80% of the aggregate amount in the trust account, which comprises 90% of the IPO proceeds raised.

Chia said these realised issues warrant a re-look at the SPAC structure in Malaysia to determine why it is not as conducive as first envisioned.

Hibiscus Petroleum Bhd was the first SPAC to be listed on Bursa Malaysia in July 2011.

It completed its QA, namely a 35% stake in Lime Petroleum plc, on April 2012.

Today, the company is a fullfledged oil and gas (O&G) exploration and production body.

SPACs that followed quickly after, namely market peers Sona Petroleum Bhd and CLIQ Energy Bhd, were not successful.

Sona Petroleum was officially delisted last month, while CLIQ is in the middle of winding up operations towards the same end.

Rakuten Trade Sdn Bhd head of research Kenny Yee Shen Pin said the two O&G-based SPACs failed to complete their respective QAs due to high valuations of O&G assets at the time.

“Both SPACs were launched when oil prices were on the high side, which pushed up the valuations of the assets that were available for sale,” Yee told TMR.

“Hibiscus Petroleum succeeded due to its first mover advantage, coupled with good timing, and was backed by a capable management team.”

Red Sena Bhd is the next SPAC likely to face delisting after it expressed doubt over its ability to complete a QA within the permitted time frame, citing deal uncertainty and unrealistic valuations as major hurdles.

The food and beverage-based SPAC was listed on Bursa Malaysia back in December 2015 and will face delisting if it does not finalise a QA in this December.

Hibiscus Petroleum is joined by Reach Energy Bhd, which became the second successful listed SPAC in Malaysia when it completed its maiden acquisition of the Kazakhstan- based oil field Emir-Oil LLP on November 2016.

Though currently operating from a net-loss position, management of the company anticipates to return to the black this year on ongoing rationalisation and efficiency efforts.