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Can a SPAC Recap a BDC?

BDCs (business development companies) need money. SPACs (special purpose acquisition vehicles) have money they need to deploy. BDC, meet SPAC.

It sounds like alphabet soup, but several SPACs and BDCs are discussing transactions, according to Michael Tew of research firm SPAC Partners.

And it does seem to make sense. BDCs, which provide financing to middle and lower middle market companies, use their balance sheets to maintain strict leverage ratios, which means that they really could use some liquidity. Moreover, BDC share prices have plummeted in recent months, at the very time when their product is in high demand.

Enter the SPACs. They have money. According to Tew, there are around 40 SPACs with about $9 billion in equity that have yet to announce a deal. Since many of them will meet their “invest or fold” deadlines within the next 12 months, they’re scrambling to find suitable targets and fighting for the same deals. The prospect of a recapitalization-type of transaction is beginning to pop up on their radars, Tew said. “The deal would look something like a pre-packaged bankruptcy would look, except the company would not go into bankruptcy,” he said.

But, I wondered, can a SPAC do that? I thought they had to do a reverse IPO transaction with a private company. I thought wrong. Apparently, a SPAC can do anything but buy bonds. This particular type of transaction would be structured like a merger, where the SPAC gets the majority stake.

However, it seems like it could be rife with unhappy parties — most notably the BDC and SPAC shareholders. SPACs have seen their proposed deals voted down one after another, as their hedge fund investors have no appetite for public securities.

According to Nicolas Kirk of financial advisory firm Hickory Group, SPACs are trying new techniques to get shareholder approval for their deals. One such technique is to strike a deal that’s lower than the equity value of the SPAC. This allows the shareholders to see some up-front cash upon the deal’s close. “It’s a way to sweeten the deal for the SPAC shareholders,” Kirk said. And as for BDC shareholders, they know how dire the situation is. “It’s either die or merge,” he said.


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