SPACs – Implications of the Inflation Reduction Act (IRA)

September 19, 2022

The recently-enacted Inflation Reduction Act (IRA) includes a 1% excise tax on stock repurchases by corporations that takes effect in January 2023. The impact for SPACs remains subject to guidance from the US Treasury. We are monitoring the situation and considering the potential implications for the CrossingBridge Pre-Merger SPAC ETF (SPC).

CB-SPAC

As shown above, the excise tax on SPC holdings should only affect 89 positions, representing 33.6% of the portfolio as of August 31, 2022. If the new tax affected the SPC portfolio to the fullest extent, the yield on the CrossingBridge portfolio would decline by approximately 70 basis points1. That said, depending on Treasury’s interpretation of the law, it may be less severe than the worst-case scenario. Moreover, as discussed below, the market has adjusted to reflect the impact of the excise tax, providing the opportunity to invest in US-domiciled pre-merger SPACs at higher expected yields that may not be reduced at all, depending on Treasury’s interpretation of the excise tax provision.

Below we provide several observations regarding the impact of the new IRA on SPACs:

The tax only applies to stock repurchases that take place beginning in 2023. SPACs that have liquidation dates in 2022 will be unaffected by this law.

The tax only applies to US-domiciled SPACs. Approximately 45% of all pre-merger SPACs currently outstanding in the market were issued by non-US companies and will, thus, be unaffected by the new law.

Redemptions may be subject to the tax while liquidations may not be. This is a nuance of the law that needs clarification. If Treasury determines that liquidations are not considered share repurchases, it should further limit the law’s impact on the SPC portfolio as SPAC sponsors that do not complete a merger may choose to simply “let the clock run out” to avoid the tax.

The SPAC market has already adjusted. According to Cantor Fitzgerald, the difference in yield for US-domiciled SPACs versus non-US SPACs before and after enactment of the IRA has increased by, on average, 89 basis points. Thus, the markets have already adjusted to provide the tax-adjusted rate of return that SPAC investors are requiring of US-based SPACs. To the extent that the tax ultimately does not apply to some of the US-based SPACs, investors may be able to keep a portion of this higher rate of return rather than having it be offset by the
excise tax.

 

Disclosures

ANY TAX OR LEGAL INFORMATION PROVIDED IS MERELY A SUMMARY OF OUR UNDERSTANDING AND INTERPRETATION OF SOME OF THE CURRENT INCOME TAX REGULATIONS AND IS NOT EXHAUSTIVE. INVESTORS MUST CONSULT THEIR TAX ADVISOR OR LEGAL COUNSEL FOR ADVICE AND INFORMATION CONCERNING THEIR PARTICULAR SITUATION. NEITHER THE FUND NOR ANY OF ITS REPRESENTATIVES MAY GIVE LEGAL OR TAX ADVICE.

INVESTING INVOLVES RISK. PRINCIPAL LOSS IS POSSIBLE. THE FUND INVESTS IN EQUITY SECURITIES AND WARRANTS OF SPACS. PRE-COMBINATION SPACS HAVE NO OPERATING HISTORY OR ONGOING BUSINESS OTHER THAN SEEKING COMBINATIONS, AND THE VALUE OF THEIR SECURITIES IS PARTICULARLY DEPENDENT ON THE ABILITY OF THE ENTITY'S MANAGEMENT TO IDENTIFY AND COMPLETE A PROFITABLE COMBINATION. THERE IS NO GUARANTEE THAT THE SPACS IN WHICH THE FUND INVESTS Will COMPLETE A COMBINATION OR THAT ANY COMBINATION THAT IS COMPLETED Will BE PROFIT ABLE. UNLESS AND UNTIL A COMBINATION IS COMPLETED, A SPAC GENERALLY INVESTS ITS ASSETS IN U.S. GOVERNMENT SECURITIES, MONEY MARKET SECURITIES, AND CASH. PUBLIC STOCKHOLDERS OF SPACS MAY NOT BE AFFORDED A MEANINGFUL OPPORTUNITY TO VOTE ON A PROPOSED INITIAL COMBINATION BECAUSE CERTAIN STOCKHOLDERS, INCLUDING STOCKHOLDERS AFFILIATED WITH THE MANAGEMENT OF THE SPAC, MAY HAVE SUFFICIENT VOTING POWER, AND A FINANCIAL INCENTIVE, TO APPROVE SUCH A TRANSACTION WITHOUT SUPPORT FROM PUBLIC STOCKHOLDERS. AS A RESULT, A SPAC MAY COMPLETE A COMBINATION EVEN THOUGH A MAJORITY OF ITS PUBLIC STOCKHOLDERS DO NOT SUPPORT SUCH A COMBINATION.

The fund's investment objectives, risks, charges, and expenses must be considered carefully before investing. The statutory and summary prospectus contains this and other important information about the investment company, and may be obtained by calling 914-741-1515. Read it carefully before investing.

CROSSINGBRIDGE ADVISORS, LLC IS THE ADVISER TO THE CROSSINGBRIDGE PRE-MERGER SPAC ETF, WHICH IS DISTRIBUTED BY FORESIDE FUND SERVICES, LLC.

[1] A basis point is one one-hundredth of 1%, i.e.70 basis points equals 0.70%.

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THE PROSPECTUS FOR THE CROSSINGBRIDGE Low duration high Income FUND, CROSSINGBRIDGE Ultra-Short duration FUND, CrossingBridge Responsible Credit Fund and Strategic income Fund CAN BE FOUND BY CLICKING HERE. THE STATEMENT OF ADDITONAL INFORMATION (SAI) CAN BE FOUND BY CLICKING HERE. TO OBTAIN A HARDCOPY OF THE PROSPECTUS, CALL 855-552-5863. PLEASE READ AND CONSIDER THE PROSPECTUS CAREFULLY BEFORE INVESTING.

THE PROSPECTUS FOR THE CROSSINGBRIDGE NOrdic High Income Bond Fund CAN BE FOUND BY CLICKING HERE. The Statement of additonal information (SAI) can be found by clicking here. TO OBTAIN A HARDCOPY OF THE PROSPECTUS, CALL 855-552-5863. PLEASE READ AND CONSIDER THE PROSPECTUS CAREFULLY BEFORE INVESTING.

THE PROSPECTUS FOR THE CROSSINGBRIDGE Pre-Merger SPAC ETF CAN BE FOUND BY CLICKING HERE. The Statement of additonal information (SAI) can be found by clicking here. TO OBTAIN A HARDCOPY OF THE PROSPECTUS, CALL 855-552-5863. PLEASE READ AND CONSIDER THE PROSPECTUS CAREFULLY BEFORE INVESTING.

THE FUNDs Are OFFERED ONLY TO UNITED STATES RESIDENTS, AND INFORMATION ON THIS SITE IS INTENDED ONLY FOR SUCH PERSONS. NOTHING ON THIS WEBSITE SHOULD BE CONSIDERED A SOLICITATION TO BUY OR AN OFFER TO SELL SHARES OF THE FUND IN ANY JURISDICTION WHERE THE OFFER OR SOLICITATION WOULD BE UNLAWFUL UNDER THE SECURITIES LAWS OF SUCH JURISDICTION.

CrossingBridge Mutual Funds’ Disclosure: MUTUAL FUND INVESTING INVOLVES RISK. PRINCIPAL LOSS IS POSSIBLE. INVESTMENTS IN FOREIGN SECURITIES INVOLVE GREATER VOLATILITY AND POLITICAL, ECONOMIC AND CURRENCY RISKS AND DIFFERENCES IN ACCOUNTING METHODS. INVESTMENTS IN DEBT SECURITIES TYPICALLY DECREASE IN VALUE WHEN INTEREST RATES RISE. THIS RISK IS USUALLY GREATER FOR LONGER-TERM DEBT SECURITIES. INVESTMENT IN LOWER-RATED AND NON-RATED SECURITIES PRESENTS A GREATER RISK OF LOSS TO PRINCIPAL AND INTEREST THAN HIGHER-RATED SECURITIES. BECAUSE THE FUND MAY INVEST IN ETFS AND ETNS, THEY ARE SUBJECT TO ADDITIONAL RISKS THAT DO NOT APPLY TO CONVENTIONAL MUTUAL FUND, INCLUDING THE RISKS THAT THE MARKET PRICE OF AN ETF'S AND ETN'S SHARES MAY TRADE AT A DISCOUNT TO ITS NET ASSET VALUE ("NAV"), AN ACTIVE SECONDARY TRADING MARKET MAY NOT DEVELOP OR BE MAINTAINED, OR TRADING MAY BE HALTED BY THE EXCHANGE IN WHICH THEY TRADE, WHICH MAY IMPACT A FUND'S ABILITY TO SELL ITS SHARES. THE VALUE OF ETN'S MAY BE INFLUENCED BY THE LEVEL OF SUPPLY AND DEMAND FOR THE ETN, VOLATILITY AND LACK OF LIQUIDITY. THE FUND MAY INVEST IN DERIVATIVE SECURITIES, WHICH DERIVE THEIR PERFORMANCE FROM THE PERFORMANCE OF AN UNDERLYING ASSET, INDEX, INTEREST RATE OR CURRENCY EXCHANGE RATE. DERIVATIVES CAN BE VOLATILE AND INVOLVE VARIOUS TYPES AND DEGREES OF RISKS, AND, DEPENDING UPON THE CHARACTERISTICS OF A PARTICULAR DERIVATIVE, SUDDENLY CAN BECOME ILLIQUID. INVESTMENTS IN ASSET BACKED, MORTGAGE BACKED, AND COLLATERALIZED MORTGAGE BACKED SECURITIES INCLUDE ADDITIONAL RISKS THAT INVESTORS SHOULD BE AWARE OF SUCH AS CREDIT RISK, PREPAYMENT RISK, POSSIBLE ILLIQUIDITY AND DEFAULT, AS WELL AS INCREASED SUSCEPTIBILITY TO ADVERSE ECONOMIC DEVELOPMENTS. INVESTING IN COMMODITIES MAY SUBJECT THE FUND TO GREATER RISKS AND VOLATILITY AS COMMODITY PRICES MAY BE INFLUENCED BY A VARIETY OF FACTORS INCLUDING UNFAVORABLE WEATHER, ENVIRONMENTAL FACTORS, AND CHANGES IN GOVERNMENT REGULATIONS. SHARES OF CLOSED-END FUND FREQUENTLY TRADE AT A PRICE PER SHARE THAT IS LESS THAN THE NAV PER SHARE.  THERE CAN BE NO ASSURANCE THAT THE MARKET DISCOUNT ON SHARES OF ANY CLOSED-END FUND PURCHASED BY THE FUND WILL EVER DECREASE OR THAT WHEN THE FUND SEEK TO SELL SHARES OF A CLOSED-END FUND IT CAN RECEIVE THE NAV OF THOSE SHARES.  THERE ARE GREATER RISKS INVOLVED IN INVESTING IN SECURITIES WITH LIMITED MARKET LIQUIDITY.

CrossingBridge Pre-Merger SPAC ETF Disclosure: Investing involves risk; Principal loss is possible. The Fund invests in equity securities and warrants of SPACs. Pre-combination SPACs have no operating history or ongoing business other than seeking Combinations, and the value of their securities is particularly dependent on the ability of the entity's management to identify and complete a profitable Combination. There is no guarantee that the SPACs in which the Fund invests will complete a Combination or that any Combination that is completed will be profitable. Unless and until a Combination is completed, a SPAC generally invests its assets in U.S. government securities, money market securities, and cash. Public stockholders of SPACs may not be afforded a meaningful opportunity to vote on a proposed initial Combination because certain stockholders, including stockholders affiliated with the management of the SPAC, may have sufficient voting power, and a financial incentive, to approve such a transaction without support from public stockholders. As a result, a SPAC may complete a Combination even though a majority of its public stockholders do not support such a Combination. Some SPACs may pursue Combinations only within certain industries or regions, which may increase the volatility of their prices. The Fund may invest in SPACs domiciled or listed outside of the U.S., including, but not limited to, Canada, the Cayman Islands, Bermuda and the Virgin Islands. Investments in SPACs domiciled or listed outside of the U.S. may involve risks not generally associated with investments in the securities of U.S. SPACs, such as risks relating to political, social, and economic developments abroad and differences between U.S. and foreign regulatory requirements and market practices. Further, tax treatment may differ from U.S. SPACs and securities may be subject to foreign withholding taxes. Smaller capitalization SPACs will have a more limited pool of companies with which they can pursue a business combination relative to larger capitalization companies. That may make it more difficult for a small capitalization SPAC to consummate a business combination. Because the Fund is non-diversified it may invest a greater percentage of its assets in the securities of a single issuer or a smaller number of issuers than if it were a diversified fund. As a result, a decline in the value of an investment in a single issuer could cause the Fund’s overall value to decline to a greater degree than if the Fund held a more diversified portfolio.

DEFINITIONS: THE S&P 500, OR SIMPLY THE S&P, IS A STOCK MARKET INDEX THAT MEASURES THE STOCK PERFORMANCE OF 500 LARGE COMPANIES LISTED ON STOCK EXCHANGES IN THE UNITED STATES. THE ICE BOFA INVESTMENT GRADE INDEX TRACKS THE PERFORMANCE OF US DOLLAR DENOMINATED INVESTMENT GRADE RATED CORPORATE DEBT PUBLICALLY ISSUED IN THE US DOMESTIC MARKET.  THE ICE BOFA HIGH YIELD INDEX TRACKS THE PERFORMANCE OF US DOLLAR DENOMINATED BELOW INVESTMENT GRADE RATED CORPORATE DEBT PUBLICALLY ISSUED IN THE US DOMESTIC MARKET.  EBITDA IS A COMPANY'S EARNINGS BEFORE INTEREST, TAXES, DEPRECIATION, AND AMORTIZATION IS AN ACCOUNTING MEASURE CALCULATED USING A COMPANY'S EARNINGS, BEFORE INTEREST EXPENSES, TAXES, DEPRECIATION, AND AMORTIZATION ARE SUBTRACTED, AS A PROXY FOR A COMPANY'S CURRENT OPERATING PROFITABILITY.  A BASIS POINT (BP) IS 1/100 OF ONE PERCENT.  PARI-PASSU IS A LATIN TERM THAT MEANS 'ON EQUAL FOOTING' OR 'RANKING EQUALLY'. IT IS AN IMPORTANT CLAUSE FOR CREDITORS OF A COMPANY IN FINANCIAL DIFFICULTY WHICH MIGHT BECOME INSOLVENT. IF THE COMPANY'S DEBTS ARE PARI PASSU, THEY ARE ALL RANKED EQUALLY, SO THE COMPANY PAYS EACH CREDITOR THE SAME AMOUNT IN INSOLVENCY.  LIBOR IS THE AVERAGE INTERBANK INTEREST RATE AT WHICH A SELECTION OF BANKS ON THE LONDON MONEY MARKET ARE PREPARED TO LEND TO ONE ANOTHER.  YIELD TO MATURITY (YTM) IS THE TOTAL RETURN ANTICIPATED ON A BOND (ON AN ANNUALIZED BASIS) IF THE BOND IS HELD UNTIL IT MATURES.  FREE CASH FLOW (FCF) IS THE CASH A COMPANY PRODUCES THROUGH ITS OPERATIONS, LESS THE COST OF EXPENDITURES ON ASSETS. IN OTHER WORDS, FREE CASH FLOW IS THE CASH LEFT OVER AFTER A COMPANY PAYS FOR ITS OPERATING EXPENSES AND CAPITAL EXPENDITURES. DURATION IS A MEASURE OF THE SENSITIVITY OF THE PRICE OF A BOND OR OTHER DEBT INSTRUMENT TO A CHANGE IN INTEREST RATES.  DEBTOR-IN-POSSESSION (DIP) FINANCING IS IS A SPECIAL KIND OF FINANCING MEANT FOR COMPANIES THAT ARE IN BANKRUPTCY. ONLY COMPANIES THAT HAVE FILED FOR BANKRUPTCY PROTECTION UNDER CHAPTER 11 ARE ALLOWED TO ACCESS DIP FINANCING, WHICH USUALLY HAPPENS AT THE START OF A FILING. DIP FINANCING IS USED TO FACILITATE THE REORGANIZATION OF A DEBTOR-IN-POSSESSION (THE STATUS OF A COMPANY THAT HAS FILED FOR BANKRUPTCY) BY ALLOWING IT TO RAISE CAPITAL TO FUND ITS OPERATIONS AS ITS BANKRUPTCY CASE RUNS ITS COURSE.  YIELD TO CALL (YTC) REFERS TO THE RETURN A BONDHOLDER RECEIVES IF THE BOND IS HELD UNTIL THE CALL DATE, WHICH OCCURS SOMETIME BEFORE IT REACHES MATURITY. The SEC yield is a standard yield calculation developed by the U.S. Securities and Exchange Commission (SEC) that allows for fairer comparisons of bond funds. It is based on the most recent 30-day period covered by the fund's filings with the SEC. The yield figure reflects the dividends and interest earned during the period after the deduction of the fund's expenses. It is also referred to as the "standardized yield."


ETF Definitions: The ICE BofA 0-3 Year U.S. Treasury Index tracks the performance of U.S. dollar denominated sovereign debt publicly issued by the US government in its domestic market with maturities less than three years. Gross Spread is The amount By which a SPAC is trading at a discount or premium to its pro rata share of the collateral trust value.  For example, if a SPAC is trading at $9.70 and shareholders’ pro rata share of the trust account is $10.00/share, the SPAC has a Gross Spread of 3% (trading at a 3% discount). Yield to Liquidation: Similar to a bond’s Yield to Maturity, SPACs have a Yield to Liquidation/Redemption, which can be calculated using the Gross Spread and Time to Liquidation. Maturity: Similar to a bond’s maturity date, SPACs also have a maturity, which is the defined time period in which they have to complete a business combination.  This is referred to as the Liquidation or Redemption Date. Price refers to the price at which the etf is currently trading. Weighted Average Life refers to the weighted average time until a portfolio of SPACs' Liqudation or redemption dates. The SEC yield is a standard yield calculation developed by the U.S. Securities and Exchange Commission (SEC) that allows for fairer comparisons of bond funds. It is based on the most recent 30-day period covered by the fund's filings with the SEC. The yield figure reflects the dividends and interest earned during the period after the deduction of the fund's expenses. It is also referred to as the "standardized yield."

Fund holdings and sector allocations are subject to change and should not be considered recommendations to buy or sell any security. ANY DIRECT OR INDIRECT REFERENCE TO SPECIFIC SECURITIES, SECTORS, OR STRATEGIES ARE PROVIDED FOR ILLUSTRATIVE PURPOSES ONLY.  When Pertaining to Commentaries posted by crossingbridge, it REPRESENTS THE PORTFOLIO MANAGER’S OPINION AND IS AN ASSESSMENT OF THE MARKET ENVIRONMENT AT A SPECIFIC TIME AND IS NOT INTENDED TO BE A FORECAST OF FUTURE EVENTS OR A GUARANTEE OF FUTURE RESULTS. THIS INFORMATION SHOULD NOT BE RELIED UPON BY THE READER AS RESEARCH OR INVESTMENT ADVICE REGARDING THE FUND OR ANY SECURITY IN PARTICULAR. SPECIFIC PERFORMANCE OF ANY security MENTIONED IS AVAILABLE UPON REQUEST.  

Any performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate so that an investor's shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Performance data current to the most recent month end may be obtained by calling 914-741-1515. Please Find the Most Current standardized performance For Each Fund as of the most recent quarter-end By clicking the following links: CrossingBridge Low Duration High Yield Fund, CrossingBridge Ultra-Short Duration Fund,  CrossingBridge Responsible Credit Fund, riverpark strategic income fund, CrossingBridge Pre-Merger SPAC ETF.   

All performance data greater than 1 year is annualized.

DIVERSIFICATION DOES NOT ASSURE A PROFIT NOR PROTECT AGAINST LOSS IN A DECLINING MARKET.

A STOCK IS A TYPE OF SECURITY THAT SIGNIFIES OWNERSHIP IN A CORPORATION AND REPRESENTS A CLAIM ON PART OF THE CORPORATION'S ASSETS AND EARNINGS. A BOND IS A DEBT INVESTMENT IN WHICH AN INVESTOR LOANS MONEY TO AN ENTITY THAT BORROWS THE FUND FOR A DEFINED PERIOD OF TIME AT A FIXED INTEREST RATE. A STOCK MAY TRADE WITH MORE OR LESS LIQUIDITY THAN A BOND DEPENDING ON THE NUMBER OF SHARES AND BONDS OUTSTANDING, THE SIZE OF THE COMPANY, AND THE DEMAND FOR THE SECURITIES. THE SECURITIES AND EXCHANGE COMMISSION (SEC) DOES NOT APPROVE, ENDORSE, NOR INDEMNIFY ANY SECURITY. Duration is a measure of the sensitivity of the price of a bond or other debt instrument to a change in interest rates.

TAX FEATURES MAY VARY BASED ON PERSONAL CIRCUMSTANCES. CONSULT A TAX PROFESSIONAL FOR ADDITIONAL INFORMATION.

Crossingbridge advisors, LLC is the Adviser to The CrossingBridge ultra-short duration fund, the crossingbridge low duration high yield fund, the crossingbridge Responsible credit fund and the riverpark strategic income fund which are distributed by QUASAR DISTRIBUTORS, LLC.

CrossingBridge ADvisors, LLC is the ADviser to the crossingbridge Pre-merger Spac ETF, which is distributed by Foreside Fund Services, LLC.