Actionable Ideas for Companies and Sponsors

SPACs Have Entered the Distressed Market  

Given the popularity and frequency of SPAC new issue activity it was only a matter of time until SPACs entered the distressed marketplace. While SPAC sponsors have typically focused their efforts on seeking high-growth target companies, more recently, there have been several SPACs focused on a value investing approach, including seeking companies that are: (i) constrained by their capital structure and in need of a liquidity infusion and balance sheet recapitalization, (ii) in the midst of an operational turnaround, or (iii) recently emerging from a bankruptcy or financial restructuring.

In 2020, many companies faced significant challenges due to COVID-19 including liquidity constraints, covenant and maturity issues, and over levered balance sheets. For such companies, SPACs can serve as a valuable source of equity to right-size their balance sheets. For the SPAC, targets with stressed or distressed capital structures provide an opportunity to invest at historically attractive valuations or at substantial discounts to publicly traded peers.

Recently, there have been six distressed focus SPACs that have been issued including Mudrick Acquisition Corp., Churchill Capital Corp, Mudrick Capital Acquisition Corp. II, Starboard Value Acquisition Corp, Goodworks Acquisition Corp., and Seaport Global Holdings. Four of these six SPACs have recently executed acquisitions. One of the more notable transactions was Churchill’s acquisition of Skillsoft in October of 2020. Skillsoft, an e-learning company, filed for bankruptcy in June of 2020 and proposed a plan of reorganization that called for creditors to exchange their debt for equity ownership, however, the plan included a provision that allowed for a “Favored Sale” to Churchill post emergence from bankruptcy. The proposed plan of reorganization was uncontested and garnered the necessary support of creditors. Skillsoft emerged from bankruptcy in August of 2020 with a “stapled sale” to Churchill that closed in October.