This is the third of a series of posts examining the redemption features of warrants in post-SPAC public companies. In the first post, we described typical redemption features in warrants. The second post discussed how issuers might economically analyze whether and when to redeem the warrants. Here, we survey data on redemptions that have occurred.
In this post, we detail how post-SPAC merger companies have used the redemption features of their warrants in practice. We find patterns indicating that companies approach the use of the redemption rationally, in light of their own capital structure and the economic tradeoffs of redemption.
While only a minority of companies have redeemed their warrants, this represents the majority of companies that were able to exercise their intrinsic redemption rights. Moreover, companies tend to exercise their intrinsic redemption rights as soon as possible. This reflects our economic analysis that intrinsic redemption is a good economic trade as long as the stock price is expected to appreciate over time.
The use of make-whole redemptions is more mixed. The economic decision is not as clear cut, because the stock price needs to appreciate meaningfully for redemption to pay off. We see a small but non-zero number of companies that take this more-bullish view, either exercising their make-whole redemption rights or, roughly equivalently, engaging in voluntary liability management transactions to retire part or all of their warrants.
For context, recall that SPAC warrants typically have two redemption features:
- An “intrinsic value” redemption where issuers effectively force investors to exercise their warrants for the in-the-money value. This redemption is usually available at stock prices above $18.00 per share.
- A “make-whole” redemption, under which issuers can force investors to exchange their warrants for a fractional number of shares that is formulaically determined as a function of stock price and remaining time to warrant expiry (meant to approximate the fair value of the warrant). This redemption is available at stock prices above $10.00 per share.
How Many and What Type of Redemptions?
We found 273 SPACs that completed mergers since 2017. Of these, 55 companies (19%) have redeemed their warrants. Like SPAC activity generally, redemptions have increased over time, with 15 of the redemptions occurring in 2020 and 38 in 2021.
The frequency of redemptions by type is listed below:
| Intrinsic Redemptions | Make-Whole Redemptions | Total |
|---|---|---|
|
42 (76%) |
13 (24%) |
55 (100%) |
The higher rate of intrinsic redemptions is consistent with our economic analysis. In intrinsic redemption, there is no time value paid to investors, so the redemption is economically advantageous for the issuer as long as the stock price at the warrant expiration date is higher than at the time of redemption. The lower rate of make-whole redemptions demonstrates that issuers do not view them as clear-cut a choice as intrinsic redemption, and a careful economic analysis of the value proposition of redemption is merited.
Companies Tend to Invoke Intrinsic Redemption Early When Able
55 redemptions is a relatively modest fraction (20%) of 273 de-SPACed companies. However, an analysis of stock prices refines this observation: of the 273, only 62 companies with warrants have triggered the stock price condition of closing at or above $18.00 for 20 of 30 trading days that allow intrinsic value redemption. Of these, most have in fact redeemed:
| Redeemed Warrants: Intrinsic | Redeemed Warrants: Make-Whole | Retired Warrants via Exchange Offer | Have Not Retired Warrants | Total | |
|---|---|---|---|---|---|
|
42 (68%) |
3 (5%) 1 |
3 (5%) |
14 (23%) |
62 (100%) |
|
A large majority of companies who could have redeemed their warrants using the intrinsic redemption feature have done so. And while not universally true, many of the companies that have not redeemed their warrants only briefly satisfied the price condition and the stock price later fell.
Moreover, these companies tend to redeem their warrants at the first opportunity: of the 42 intrinsic redemptions, the vast majority occurred within 1 month of the stock price triggering the $18.00 price condition after merger close.
| < 1 month after first trigger | 1 - 3 months | 3 - 6 months | > 6 months | Total |
|---|---|---|---|---|
|
32 (76%) |
7 (17%) |
2 (5%) |
1 (2%) |
42 (100%) |
As an example, in its press release announcing (cashless) redemption, Tattooed Chef stated “We took action on the first day allowed under the terms of the Warrant Agreement and we believe this decision will enhance long-term stockholder value.”
Redemption Settlement
We also examined the type of settlement used when warrants are redeemed. Make-whole redemptions are always net-share settled, so here we focus on intrinsic redemptions.
Of the intrinsic redemptions, only one-fourth of companies used cashless exercise, with three-fourths using physical exercise. The settlement choice usually involved a choice by the issuer: in all but a handful of cases, issuers could elect intrinsic redemption via physical or cashless exercise. Most chose physical.
| Cashless Exercise | Physical Exercise | Total |
|---|---|---|
|
11 (26%) |
31 (74%) 2 |
42 (100%) |
While most issuers announce redemption with minimal commentary, some press releases provided a bit of context. Those who elected cashless exercise emphasized capital structure simplification and dilution mitigation (in some cases highlighting that voluntary investor warrant exercises had already generated meaningful cash).
- “We have received $124 million of cash from warrant exercises to date, and now our cash balance is well over $200 million, which provides us greater financial flexibility and opportunities to invest in strategic growth initiatives. In addition, by invoking the cashless exercise alternative in our redemption notice, we have mitigated further dilution to our stockholders. Instead of 20 million shares being added to our Common Stock outstanding, by virtue of the cashless exercise only 15.3 million shares will be added…” — Tattooed Chef
- “As of March 18, 2021, approximately 7.7 million public warrants had been voluntarily exercised on a cash basis, generating approximately $89.0 million of cash proceeds to Fisker…. By electing to limit exercise of the remaining public warrants to a cashless basis …, the total dilutive impact to common shareholders will be limited to approximately 3.7% as compared to 7.2% under a cash exercise method.” — Fisker
Companies using physical exercise emphasized adding cash to the balance sheet.
- “We are pleased to streamline our capital structure following the close of our business combination and enhance our cash position by eliminating the Public Warrants.” — Desktop Metal
- “Utz announced that it will redeem all outstanding public warrants…, which if exercised in full by all holders … will result in approximately $181.3 million of gross proceeds to Utz and an additional 15.8 million shares of Class A Common Stock being issued and outstanding. These proceeds, together with up to $320 million of incremental term loans, are anticipated to be used to repay the bridge debt financing that was used by Utz to fund the purchase price for the Truco acquisition.” — Utz Brands
Make-Whole Redemption
While there are fewer data points on make-whole redemptions, we make a few observations: First, like redemptions generally, they are accelerating in frequency. Of the 13 make-whole redemptions that have occurred, 3 occurred in Q3 2021 and 8 have occurred in Q4 so far.
Second, a large number of make-whole redemptions occur with stock prices in the $10 – 12 vicinity, suggesting that when companies reach the conceptual conclusion that there is likely enough upside in the stock (or value in capital structure simplicity) to overcome the hurdle of partial share issuance for warrant time value, there is no need to wait for higher stock prices / later times to see that time value penalty decrease. Another cluster tends to occur at prices around $18.00, where the make-whole redemption settlement is close in value to intrinsic redemption (but intrinsic redemption is technically not available).
Voluntary Exchanges
For companies for whom redemption is not available, either because the stock price is below $18.00 and only intrinsic redemption is available, or because the stock price is below $10.00, voluntary liability management transactions are an alternative.
These can be public exchange offers to all holders, or privately negotiated exchanges with a single holder.
Examples of privately negotiated exchanges were Kaleyra and Grid Dynamics. Each company exchanged large fractions of their public warrants into shares in a negotiated exchange with a single holder (once again, those warrants had intrinsic redemption only and the stock prices were well under $18.00).
Economics in these situations tend to be akin to those in make-whole redemptions, with holders receiving fractions of shares per warrant similar to values seen in tables. Because investors voluntarily participate, the exchange value must reflect the market value of the warrants, including option time value.
Conclusion
As more companies complete their transition from private to public via deSPAC merger, liability management of SPAC warrants will grow in frequency and importance. While each company must assess its own capital structure and valuation, the data above demonstrates that a large number of companies have gone through a similar decision process.
For detailed analysis and advice regarding your specific situation, please reach out to the Matthews South team.
1 Two of the make-whole redemptions in this universe (OpenDoor and SoFi) were both companies that had briefly exceeded the $18.00 threshold, and later redeemed when the threshold was no longer satisfied. The third (Archaea Energy) triggered redemption at a time when the stock price was above $18.00 but it hadn’t reached 20 out of 30 days above that level.
2 One issuer, The Beauty Health Company, provided holders with a choice between physical and cashless settlement. However, the mechanics of those warrants capped the payout on cashless settlement such that it was economically inferior to physical settlement. As such, we consider it a physical settlement redemption.
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