The rise of special purpose acquisition companies (SPACs) over the last year has been a significant news story in capital markets. For years, SPACs have had a tarnished reputation
for having conflicts of interest and lackluster returns. On the surface, investing in SPACs, or “blank check companies” as they are also known, seems dubious given the absence of an actual operating business at IPO. Notwithstanding these legitimate concerns, the proliferation of SPACs has been a clear positive for investors in leveraged capital markets, in particular, bank loans and high yield (HY) bonds. Highly leveraged companies are attractive targets for SPACs, which bring to the targets a source of capital that was largely unavailable as recently as 2019. As a result, investors in the debt issues of leveraged companies have event-catalyst upside when target companies are ultimately merged into SPACs.