Friday, 12 December 2014

Increasing risk in the warrants of oil & gas SPAC

Oil & Gas SPACs have dropped to a very attractive level where they offer almost "risk free" investment with attractive return of 10% to 15% per annum. See here for more details.

This can be achieved by:

i) hold the shares in SPAC until liquidation.
ii) vote against if there is any qualified acquisition. Those who vote against will receive their pro rata portion of the amount held in trust account plus interest even if the acquisition goes through.

However, this is not the case for their warrants.

The warrant can only be exercised from the completion of the qualifying acquisition until the expiry of the warrants.

For an acquisition to go through, it needs at least 75% of the total value of shares held by all shareholders present and voting. However, it may become increasingly tougher to obtain shareholders' approval to proceed with acquisition, due to:

With the high uncertainty and fluctuation in the oil price, existing  SPAC shareholders who are risk averse may want to play safe and vote against any proposed acquisition to get their money back.

The current share prices of SPACs may have attracted some investors who jumped in for the "risk-free" investment and yet offers at least 3x the return of fixed deposit. This group of investors who seek "risk free" high return will vote against any proposed acquisition regardless how attractive the acquisition is.

These make investment in warrants of oil & gas SPAC very risky, with the risk of the warrants becoming "toilet paper", so to speak (we have gone scripless since the introduction of CDS).

This can be seen from the sharper drops in the warrant prices of SONA and CLIQ recently as compared to their mothers.

In these cases, the investors 要乸唔要仔

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