In the past two years, many outlets of finance have prospered given the lowest cost of funds in decades with ample liquidity. Within such categories is one of the categories that benefited the most from doing and committing the least and it is called Special Purpose Acquisition Companies (SPAC) or blank cheque company.
In 2021, 613 SPAC got listed with a total of $145 Bn raised. As of today the market capitalisation of these companies is between 30-70% down from the listing peak.
The problem with this category is not like other listed companies. This category has a large financial risk attached to it. A SPAC gets listed with a promise that the company will complete the merger with another company in a stipulated time frame. In case the merger does not happen then there is a large loss to the underwriter and the shareholders.
Given the current environment, the fulfillment of 613 promises becomes impossible as the stipulated time for them is three years from listing as the value of these companies have already fallen drastically. And as a result of it, the smartest advisors on Wall Street have started distancing themselves from these companies.
But this would not stop the bubble from bursting or the house of cards to fall. The important thing to see is, how the regulator and US Treasury Department contain the damage from it.
For now, the focus is on reducing inflation. And as the Fed Chair said yesterday, the factors for avoiding hard landing are out of his control. So be prepared for a roller coaster that has just reached the first loop of many.
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