FIS Convertible Bond Services
SPAC WARRANTS MODELING THE SOFT CALL
WHITE PAPER
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A Special Purpose Acquisition Company (SPAC), also known as a "blank cheque company", identifies and acquires a target company to take public. This white paper takes a look at how greater accuracy on SPAC warrants can be achieved with FIS Convertible Bond Services, with terms and conditions data for the SPAC warrants universe.
The SPAC lists on a stock exchange in order to raise money from investors who typically pay $10 per unit, consisting of an ordinary share and an option to buy more shares later via warrants. The SPAC has a limited amount of time (typically two years) in which to complete a successful acquisition, or initial business combination (IBC), after which the warrants become exercisable. A key difference from traditional warrants is that SPAC warrants may be redeemed by the issuer once the shares exceed a trigger price, the issuer soft call. At FIS, we have extended our FIS Convertible Bonds Service (formerly Monis) warrant model to include a soft-call feature and allow SPAC warrants to be modelled more accurately.
SPAC warrants
Let’s Solve Climate and Sustainability Risk
What a difference a century makes
Global Head of Product Governance & ESG Oversight, Deutsche Bank
As the world of climate science and finance enter the same arena, fund managers, advisers, banks, corporations and sovereigns would all do well to recognize the risks and rewards.
As we enter 2021, there’s a lot more
information
for actuaries to navigate – and luckily,
a lot more computing power to manage it all.
& complexity
As we continue our path through this pandemic, it’s apparent that modeling must adapt—and adapt fast—to assimilate new and increasing data sets. Actuaries will need to not only model the impact of the novel coronavirus over the next five years, but also make sure that their models and solvency plans are effective enough to handle another global health crisis, no matter what form it takes.
Below are just some of the questions that actuaries must address in a new generation of risk models, scenarios and simulations.
To learn more, visit our dedicated Regulation and Risk website, or our Trading website. Alternatively, speak to one of our solutions advisors on email getinfo@fisglobal.com.
SPAC warrant case study
SPAC warrants
Further research
NEXT
Product Regs
$11.50 exercise price (strike)
SPAC warrant with summary terms as per below:
SPAC warrant case study
all of which are heightened with a remote workforce.
governance
Not only were largely office-based infrastructures under extreme pressure, but the pandemic also raised concerns about:
security
scalability
(period to expiration of warrants)
NEXT
ESG Regulatory Landscape – Global
Should there be flat additions for mortality, or should older age groups and impaired lives be affected differently?
Could excess deaths be spread out over a number of years?
And ultimately, should there be a stronger correlation between mortality and the economic fallout of a pandemic?
This simple model needs to be revisited
for internal risk management purposes.
NEXT
In consultation with Financial Conduct Authority’s Climate Financial Risk Forum (CFRA), the UK Department of Work and Pensions (DWP) is taking steps to improve governance and reporting activities relative to climate risk. Obligations for UK pension schemes reporting over £5B in assets are effective October 2021, raising accountability levels to new heights.
Further, as socially driven millennial investors increasingly participate in family and wealth management decisions, managers will be expected to include ESG and sustainable criteria in supporting investment recommendations. A 2020 UBS Global Family Office Report revealed that 60% of families now regard sustainable investing as important for their legacies, and 39% of offices intend to allocate most of their portfolios sustainably over the next five years.
The level of involvement across markets depends largely on access to data and improved transparency to bridge the public-private ESG gap. Listed equity and fixed income markets have benefitted from data, tools and services provided by advisors, vendors and ESG rating agencies, accelerating their adoption of consistent data collection and reporting standards.
But in private markets, independent climate risk solutions are limited. Gathering, structuring and organizing the vast amounts of private data required to report progress hinge on improving the toolsets.
Private companies make up more than 90% of global business. That said, the UN Principles of Responsible Investment (UNPRI) initiative has advanced adoption of ESG standards, adding 262 firms in Q3 2020, boosting the total of number of signatories worldwide to 3,300.
The real test will come when demands for ESG considerations increase. Complete due diligence and investor reporting requirements have yet to take effect as measurable ESG impact metrics remain unclear.
According to a 2021 Limited Partner (LP) Perspective Study from Private Equity International, 88% of investor LPs accounted for ESG considerations as part of their due diligence, compared with 80% the prior year. IHS Markit’s LP Footprint Project, analyzing 163 LPs across Europe, North America and Asia found that 63% of LPs researched have public ESG policies, 59% have signed on with PRI, and 40% publicly publish annual ESG reports.
The pressure is on for private market managers to adopt ESG standards, differentiate their offerings and provide portfolio transparency through impact reporting. As a more harmonized set of standards emerges, more firms are expected to enhance their portfolio monitoring and reporting with ESG and climate-risk management processes.
Different Rules for Different Asset Classes
Even now, the pandemic’s impact on mortality rates isn’t well understood. In the first half of 2020, many experts believed that the majority of COVID-19 deaths were linked to underlying health conditions and seen essentially as bringing forward deaths from future years. As a result, it was assumed that future populations would then be slightly healthier, causing the average mortality rate to fall in subsequent years.
That school of thought is already becoming dated. Now, discussions center more on the effects of social isolation on mortality, delays in routine screening for cancer and early cancer diagnosis, so-called “long COVID” and the socio-economic consequences of a lockdown-induced recession. These impacts are not well understood yet but have the potential to increase mortality rates.
What’s the outlook on excess mortality?
Review the resilience of your solvency platform and framework
The final surface below looks at the valuation profile of the SPAC warrant with both calls active as we reduce the time to maturity (three months at a time), varying volatility and using a constant spot price of $10. As expected, throughout the instrument's lifetime, we continue to see this capping effect of the $10 triggered call above approximately 40% volatility.
By definition, however, the COVID-19 outbreak is actually a white-swan event: not the first of its kind and therefore predictable and actually likely to occur at some point.
The Need for Regulatory Standards
The below chart shows the impact on valuations of modeling the $10 triggered call in addition to the $18 triggered call, using a fixed $10 spot price. The $10 triggered call has minimal impact for volatilities below 40%, yet has a clear capping effect thereafter, which is not present when only the $18 triggered call is considered. It would therefore be prudent, in the absence of explicitly modelling the $10 call, to cap user input volatility assumptions at around 40% for instruments with this feature, even where realized volatility is much higher.
modeling the calls
Regulation has traditionally led insurers’ robust approach to solvency, with Solvency II driving stronger governance and control of modeling results. Now, critically, insurers must look deeper and consider all of the aspects of their solvency models that haven’t worked as well.
You must also ask yourself serious questions about the changing nature of the workplace in the pandemic. Will what started off as emergency lockdown measures become a more permanent shift and keep many staff working from home or remotely more often? Should cloud computing and SaaS-based platforms form part of your protection against future challenges to business continuity?
further research
Email us to find out more
Let’s solve insurance risk with flexibility and control
When it comes to capital management, you need to know that your reserves can withstand the very worst-case scenarios: extreme, black-swan events that would otherwise cause insolvency.
Demonstrating how sustainable investments not only achieve non-financial aims but also enhance a strategy’s risk-return will be a key to achieving ESG and climate-oriented goals in the future.
"
previous
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previous
previous
Martin Sarjeant, senior vice president, Product Management, Insurance, FIS
But many of the assumptions that make up risk models
are best estimates.
The flat region we observe in the valuation surface, above approximately 40% volatility, leads to a strongly concave relationship between price and volatility. This suggests that a stochastic volatility model may be an important further area of research when analyzing the negative impact of the $10 triggered call.
In our example, we have not attempted to capture some of the more subtle features of the cashless exercise payoff which could be of interest, especially in high volatility environments where the $10 call would appear to impinge most on valuations. One such subtlety is that the share price lookup used in the cashless exercise table is often determined using an n-day average or volume weighted price, making the payoff path dependent and the warrant’s relationship with volatility even more complex. Another such detail is the period between the call notice being given by the issuer and the effective call date, on which the exchange of warrants for shares occurs, which makes the forced exercise akin to a compound option which we would expect to add some additional value.
Look at the stresses and combinations of stresses that you are running on your models. How did any pandemic modeling you carried out compare to actual COVID-19 results and would it have protected you in previous pandemics? Or should the stresses be higher and more explicitly targeted?
In terms of solvency, it’s important to gauge how well your stochastic and stress tests on models actually protected your company. What’s more, could you have survived any additional shocks after the initial market falls in March? By focusing on reverse stress testing, you can uncover any hidden risks and vulnerabilities that may also cause insolvency.
Assess stress testing
Consider layering on several mortality scenarios, but be prudent and make sure you underestimate for annuitant mortality and overestimate for life assurance mortality.
Some basic assumptions should also be made in the stresses about the pattern of mortality either worsening due to increased deaths from COVID-19 or the impact of long-COVID improving because of improved public health, hygiene and resistance to future viruses or flus.
However, remember that at this stage there is still a danger of over-modeling, overthinking and spurious accuracy, with not enough data or knowledge to support more complex models.
Rethink mortality assumptions
Tying back to your solvency platform and framework, actuaries need to be able to answer senior managers’ most fundamental questions, fast. At the start of the pandemic, C-suite executives were desperate to know what could happen next, the impact on their solvency ratio and whether risk teams could model all this remotely.
To consistently provide a rapid response in these circumstances, you need a risk platform that is well governed, scalable and accessible in the cloud, with the flexibility to model changes quickly.
Deliver timely information
Solvency modernization is now a reality for insurers around the world, with many countries echoing the spirit and format of Solvency II and the upcoming Insurance Capital Standard.
Beyond compliance, these supervisory guidelines are helping create a stronger insurance sector and improving protection for policyholders and the overall management of insurance companies. What better reasons to modernize solvency through both your technology and your risk modeling framework?
Push ahead to meet new solvency requirements
What are the systematic or specific sources of risk and return?
However, there are still clear lessons
to learn and much room for risk management to improve going forward.
previous
Modeling the calls
Solvency modernization is now a reality for insurers around the world, with many countries echoing the spirit and format of Solvency II and the upcoming Insurance Capital Standard.
Beyond compliance, these supervisory guidelines are helping create a stronger insurance sector and improving protection for policyholders and the overall management of insurance companies. What better reasons to modernize solvency through both your technology and your risk modeling framework?
Push ahead to meet new solvency requirements
Tying back to your solvency platform and framework, actuaries need to be able to answer senior managers’ most fundamental questions, fast. At the start of the pandemic, C-suite executives were desperate to know what could happen next, the impact on their solvency ratio and whether risk teams could model all this remotely.
To consistently provide a rapid response in these circumstances, you need a risk platform that is well governed, scalable and accessible in the cloud, with the flexibility to model changes quickly.
Deliver timely information
Consider layering on several mortality scenarios, but be prudent and make sure you underestimate for annuitant mortality and overestimate for life assurance mortality.
Some basic assumptions should also be made in the stresses about the pattern of mortality either worsening due to increased deaths from COVID-19 or the impact of long-COVID improving because of improved public health, hygiene and resistance to future viruses or flus.
However, remember that at this stage there is still a danger of over-modeling, overthinking and spurious accuracy, with not enough data or knowledge to support more complex models.
Rethink mortality assumptions
Look at the stresses and combinations of stresses that you are running on your models. How did any pandemic modeling you carried out compare to actual COVID-19 results and would it have protected you in previous pandemics? Or should the stresses be higher and more explicitly targeted?
In terms of solvency, it’s important to gauge how well your stochastic and stress tests on models actually protected your company. What’s more, could you have survived any additional shocks after the initial market falls in March? By focusing on reverse stress testing, you can uncover any hidden risks and vulnerabilities that may also cause insolvency.
Assess stress testing
Regulation has traditionally led insurers’ robust approach to solvency, with Solvency II driving stronger governance and control of modeling results. Now, critically, insurers must look deeper and consider all of the aspects of their solvency models that haven’t worked as well.
You must also ask yourself serious questions about the changing nature of the workplace in the pandemic. Will what started off as emergency lockdown measures become a more permanent shift and keep many staff working from home or remotely more often? Should cloud computing and SaaS-based platforms form part of your protection against future challenges to business continuity?
Review the resilience of your solvency platform and framework
That said, some firms may be treating the COVID-19 pandemic as a black-swan event because they hadn’t allowed for it in their risk models. While it’s these insurers that most urgently need to take a closer, more critical look at their risk management processes, it’s down to every organization to think beyond COVID-19 and model truly extreme, black-swan events.
Nikhil Chouguley
Founder, Reframe Capital
Benjamin Lamping
Managing Director, Alpha Centauri Investment Management
Ulf Füllgraf
5-year maturity
redemption date
FALSE
TRUE
correct!
TRY AGAIN!
It is easy to measure and monitor ESG performance.
Broad ESG and climate change considerations have no economic investment value of their own. Given individual values, principles and beliefs on one side and economic materiality on the other, ESG information should be seen as an added component to investment decisions, not as a sole driver.
"
"
Managing Director, Alpha Centauri Investment Management
Ulf Füllgraf
If the strategy exposes investors to impacts on individual companies, what is the source of alpha?
In the case of systematic risk, is the risk priced and paid for in the form of true risk premia or is it unpaid, as is the case in sector risks?
?
In the firm’s 2017 study, “The Search of Climate Smart Investments,” AC found that climate risk is already priced and paid for in European equity markets. Further, the study uncovered a “low carbon-factor” in European equities that, when incorporated into risk models, proved only a low correlation to other “pure” factors in European equities, causing, perhaps, a small tilt to more defensive factors, such as low volatility/beta.
Based on the research, AC developed “long only” equity strategies that offer carbon footprint reductions of around 80%, compared to its classic benchmark strategies and long/short strategies with an already negative carbon footprint. At AC, all strategies exhibit tracking error or volatility levels of around 5%, consistent with the firm’s core belief that investors must take active risk but avoid “intended risks” to succeed in ESG and climate-related investments.
NEXT
previous
Take the Holistic View
Risk Management
The latest release of our Convertible Bond API Manager incorporates the ability to model a soft-call feature for the warrant instrument. For SPAC warrants where both the $18 and $10 calls exist we believe the results of our analysis demonstrate the validity in modelling the $18 triggered soft call whilst capping the input vol assumption at a maximum 40% as a proxy for the impact of the $10 triggered forced cashless exercise.
The FIS Convertible Bond Data Service has been extended to provide and maintain the terms and conditions data for the SPAC warrants universe. Warrants for those SPACs that are in their pre-acquisition stage of life are modelled using their rolling (typically 5 year) maturity. Once the merger is complete, terms are updated to their known fixed dates.
Today’s expanding green movement is causing global investment firms to rethink their approach to growth. But how do you strike the right balance between risk and return?
Survey the global ESG regulatory landscape and determine what gaps you have in gathering, structuring and organizing the data it takes to compete. With the right information, you can more accurately model and measure climate and sustainability risk and offer your investors the returns and the green status they seek in today’s evolving, environmentally conscious global marketplace.
With only a limited history on which to view ESG and climate-related investing, a holistic view on risk and reward is the safest path forward.
Most ESG indices and ETFs are output-oriented, tending to leave much unintended risk on the table. Investors, on the other hand, base decisions on outcome-oriented data, placing more importance on performance and risk factors than asset allocation.
So, it follows that in many cases, ESG and climate-related investing, at least for now, represents a set of “optimized island solutions” that potentially result in return drag and uncompensated risk in the context of a larger, diversified portfolio.
To minimize factor alignment problems within risk models, a Principal Component Analysis (PCA) approach is recommended. It should support a diverse set of investment strategies and regulatory regimes, including pre-trade analysis, forward-looking stress tests, risk attribution, risk analysis, risk monitoring and risk reporting, with multi-asset-class factor modeling capabilities built in.
ESG and factor investing as satellites: danger of “optimized island solutions”
Author William W. Weichhart, senior analyst, FIS Cross-asset Trading and Risk business. With special thanks to Rhory Ashworth, quantitative developer at Mako Trading, for his contribution to this white paper.
modelling spac warrants in fis convertible bond services
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View now
Get greater accuracy on SPAC Warrants with FIS soft-call warrant remodeling feature
Contact us for a demo or for further information on email getinfo@fisglobal.com
Webinar
“Climate Risk and Sustainability Risk Measures in Investment Strategy”
With special thanks to our guest speakers and white paper contributors:
Nikhil Chouguley, Global Head of Product Governance & ESG Oversight, Deutsche Bank.
Benjamin Lamping, Founder, Reframe Capital.
Ulf Füllgraf, Managing Director, Alpha Centauri Investment Management.
•
•
•
Further research
Modeling the calls
SPAC warrant case study
SPAC warrants
NEXT
Risk Management
ESG and factor investing as satellites: danger of “optimized island solutions”
Read now
Let’s Solve Climate and Sustainability Risk
To learn more, visit our dedicated Regulation and Risk website, or our Trading website. Alternatively, speak to one of our solutions advisors on email getinfo@fisglobal.com.
©2021 FIS FIS and the FIS logo are trademarks or registered trademarks of FIS or its subsidiaries in the U.S. and/or other countries. Other parties’ marks are the property of their respective owners. 1599681
linkedin.com/company/fis
twitter.com/fisglobal
www.fisglobal.com
previous
The flat region we observe in the valuation surface, above approximately 40% volatility, leads to a strongly concave relationship between price and volatility. This suggests that a stochastic volatility model may be an important further area of research when analyzing the negative impact of the $10 triggered call.
In our example, we have not attempted to capture some of the more subtle features of the cashless exercise payoff which could be of interest, especially in high volatility environments where the $10 call would appear to impinge most on valuations. One such subtlety is that the share price lookup used in the cashless exercise table is often determined using an n-day average or volume weighted price, making the payoff path dependent and the warrant’s relationship with volatility even more complex. Another such detail is the period between the call notice being given by the issuer and the effective call date, on which the exchange of warrants for shares occurs, which makes the forced exercise akin to a compound option which we would expect to add some additional value.
FURTHER RESEARCH
NEXT
previous
Solvency modernization is now a reality for insurers around the world, with many countries echoing the spirit and format of Solvency II and the upcoming Insurance Capital Standard.
Beyond compliance, these supervisory guidelines are helping create a stronger insurance sector and improving protection for policyholders and the overall management of insurance companies. What better reasons to modernize solvency through both your technology and your risk modeling framework?
Push ahead to meet new solvency requirements
Tying back to your solvency platform and framework, actuaries need to be able to answer senior managers’ most fundamental questions, fast. At the start of the pandemic, C-suite executives were desperate to know what could happen next, the impact on their solvency ratio and whether risk teams could model all this remotely.
To consistently provide a rapid response in these circumstances, you need a risk platform that is well governed, scalable and accessible in the cloud, with the flexibility to model changes quickly.
Deliver timely information
Consider layering on several mortality scenarios, but be prudent and make sure you underestimate for annuitant mortality and overestimate for life assurance mortality.
Some basic assumptions should also be made in the stresses about the pattern of mortality either worsening due to increased deaths from COVID-19 or the impact of long-COVID improving because of improved public health, hygiene and resistance to future viruses or flus.
However, remember that at this stage there is still a danger of over-modeling, overthinking and spurious accuracy, with not enough data or knowledge to support more complex models.
Rethink mortality assumptions
Look at the stresses and combinations of stresses that you are running on your models. How did any pandemic modeling you carried out compare to actual COVID-19 results and would it have protected you in previous pandemics? Or should the stresses be higher and more explicitly targeted?
In terms of solvency, it’s important to gauge how well your stochastic and stress tests on models actually protected your company. What’s more, could you have survived any additional shocks after the initial market falls in March? By focusing on reverse stress testing, you can uncover any hidden risks and vulnerabilities that may also cause insolvency.
Assess stress testing
Regulation has traditionally led insurers’ robust approach to solvency, with Solvency II driving stronger governance and control of modeling results. Now, critically, insurers must look deeper and consider all of the aspects of their solvency models that haven’t worked as well.
You must also ask yourself serious questions about the changing nature of the workplace in the pandemic. Will what started off as emergency lockdown measures become a more permanent shift and keep many staff working from home or remotely more often? Should cloud computing and SaaS-based platforms form part of your protection against future challenges to business continuity?
Review the resilience of your solvency platform and framework
That said, some firms may be treating the COVID-19 pandemic as a black-swan event because they hadn’t allowed for it in their risk models. While it’s these insurers that most urgently need to take a closer, more critical look at their risk management processes, it’s down to every organization to think beyond COVID-19 and model truly extreme, black-swan events.
By definition, however, the COVID-19 outbreak is actually a white-swan event: not the first of its kind and therefore predictable and actually likely to occur at some point.
When it comes to capital management, you need to know that your reserves can withstand the very worst-case scenarios: extreme, black-swan events that would otherwise cause insolvency.
But many of the assumptions that make up risk models
are best estimates.
The below chart shows the impact on valuations of modeling the $10 triggered call in addition to the $18 triggered call, using a fixed $10 spot price. The $10 triggered call has minimal impact for volatilities below 40%, yet has a clear capping effect thereafter, which is not present when only the $18 triggered call is considered. It would therefore be prudent, in the absence of explicitly modelling the $10 call, to cap user input volatility assumptions at around 40% for instruments with this feature, even where realized volatility is much higher.
MODELING THE CALLS
NEXT
previous
NEXT
previous
ESG Regulatory Landscape – Global
Fund Managers Advisers / DPMs Insurance Banks Corporates Sovereigns
Product Regs
Prudential Regs
Prudential Regs
europe
americas
asia
SFDR
NFRD / CSRD
MAS ESG Guidelines
SEC Risk Alert - Greenwashing
EU Green Bonds
EU Taxonomy
AIFMD / UCITS
HK – ESG Circular
MiFID
Green Lending
CSRD
EU Taxonomy
TCFD
PRA Climate Risk
EU Pillar 3
SP/Derivatives
Data
Type of Firm
all of which are heightened with a remote workforce.
scalability
security
governance
Not only were largely office-based infrastructures under extreme pressure, but the pandemic also raised concerns about:
SPAC warrant with summary terms as per below:
SPAC WARRANT CASE STUDY
To learn more, visit our dedicated Regulation and Risk website, or our Trading website. Alternatively, speak to one of our solutions advisors on email getinfo@fisglobal.com.
Let’s Solve Climate and Sustainability Risk
NEXT
for actuaries to navigate – and luckily,
a lot more computing power to manage it all.
& complexity
information
As we enter 2021, there’s a lot more
As the world of climate science and finance enter the same arena, fund managers, advisers, banks, corporations and sovereigns would all do well to recognize the risks and rewards.
A Special Purpose Acquisition Company (SPAC), also known as a "blank cheque company", identifies and acquires a target company to take public. This white paper takes a look at how greater accuracy on SPAC warrants can be achieved with FIS Convertible Bond Services, with terms and conditions data for the SPAC warrants universe.
The SPAC lists on a stock exchange in order to raise money from investors who typically pay $10 per unit, consisting of an ordinary share and an option to buy more shares later via warrants. The SPAC has a limited amount of time (typically two years) in which to complete a successful acquisition, or initial business combination (IBC), after which the warrants become exercisable. A key difference from traditional warrants is that SPAC warrants may be redeemed by the issuer once the shares exceed a trigger price, the issuer soft call. At FIS®, we have extended our FIS Convertible Bonds Service (formerly Monis) warrant model to include a soft-call feature and allow SPAC warrants to be modelled more accurately.
Managing Director, Alpha Centauri Investment Management
Ulf Füllgraf
Founder, Reframe Capital
Benjamin Lamping
Global Head of Product Governance & ESG Oversight, Deutsche Bank
Nikhil Chouguley
SPAC WARRANTS
The soft call is typically for a minimal cash amount (e.g. $0.01 per warrant) and exists in order to force a holder to exercise once the share price typically reaches $18. Roughly half of the SPAC warrants issued during the last 18 months have also included a second soft call, with a $10 trigger. Both calls are active throughout the life of the instrument. We shall refer to these as the "$18 triggered call" and the "$10 triggered call", where these cash amounts refer to the calls’ share price trigger level.
The $18 triggered call exists to force exercise when the stock price performs well, and the exercise is defined as per the usual exercise rights available to the holder. The $10 triggered call is more complex. In this case the warrants are exercised on a cashless basis – holders pay no exercise price, but instead surrender their warrants for a fraction of the shares they would have received. A pre-defined table of share prices and remaining time to maturity is used to determine the number of shares holders receive (rather like the make-whole replacement shares table for a convertible instrument). This forces holders to exercise on a cashless basis and allow the company to avoid the higher level of dilution a full exercise would result in, but at the expense of foregoing any additional capital injection.
Early redemption
European exercise (with exercise on call)
Lifetime call for $0.01 with a $18 trigger, with regular exercise
Lifetime call for $0.10 with a $10 trigger, with cashless exercise
Risk-free rate 3%
The $10 triggered call, or cashless exercise call, has a payoff as defined by the below table, where the lookup is done based upon the current share price and months until the maturity date. The value in the table represents the number of shares per warrant received upon exercise. The values used in these tables are almost entirely generic across all SPAC warrant instruments featuring the cashless exercise call.
60 months
57 months
0.261
0.281
0.297
0.311
0.324
0.337
0.348
0.358
0.361
0.257
0.277
0.294
0.310
0.324
0.337
0.348
0.358
0.361
0.252
0.272
0.291
0.307
0.322
0.335
0.347
0.357
0.361
54 months
0.246
0.268
0.287
0.304
0.320
0.333
0.346
0.357
0.361
51 months
48 months
0.241
0.263
0.283
0.301
0.317
0.332
0.344
0.356
0.361
0.235
0.258
0.279
0.298
0.315
0.330
0.343
0.356
0.361
45 months
0.228
0.252
0.274
0.294
0.312
0.328
0.342
0.355
0.361
42 months
0.221
0.246
0.269
0.290
0.309
0.325
0.340
0.354
0.361
39 months
36 months
0.213
0.239
0.263
0.285
0.305
0.323
0.339
0.353
0.361
0.205
0.232
0.257
0.280
0.301
0.320
0.337
0.352
0.361
33 months
0.196
0.224
0.250
0.274
0.297
0.316
0.335
0.351
0.361
30 months
0.185
0.214
0.242
0.268
0.291
0.313
0.332
0.350
0.361
27 months
24 months
0.173
0.204
0.233
0.260
0.285
0.308
0.329
0.348
0.361
0.161
0.193
0.223
0.252
0.279
0.304
0.326
0.347
0.361
21 months
0.146
0.179
0.211
0.242
0.271
0.298
0.322
0.345
0.361
18 months
0.130
0.164
0.197
0.230
0.262
0.291
0.317
0.342
0.361
15 months
0.111
0.146
0.181
0.216
0.250
0.282
0.312
0.339
0.361
12 months
9 months
0.090
0.125
0.162
0.199
0.237
0.272
0.305
0.336
0.361
0.065
0.099
0.137
0.178
0.219
0.259
0.296
0.331
0.361
6 months
0.034
0.065
0.104
0.150
0.197
0.243
0.286
0.326
0.361
3 months
-
-
0.042
0.115
0.179
0.233
0.281
0.323
0.361
0 months
Fair Market Value of Class A Common Stock
≤10.00
11.00
12.00
13.00
14.00
15.00
16.00
17.00
≥18.00
Varying volatility and spot price for the warrant with both the $18 and $10 triggered calls active produces the valuation surface, illustrated below. Volatility (%) is assumed flat over the instrument lifetime and the spot price ranges from $8 up to a maximum of $21. Above the $18 spot we observe the expected behavior whereby the fair value is given simply by the spot minus the strike, represented by the perfectly flat plane we see above $18 spot, irrespective of the volatility assumptions. Also, of interest is the flat plane we see above approximately 40% volatility for all spot prices. This corresponds to the capped region in the previous graph and is the impact observed as a direct result of the $10 triggered call.
Benefit from our convertible bond data service for terms and conditions data for the SPAC warrants universe.
Early redemption
The soft call is typically for a minimal cash amount (e.g. $0.01 per warrant) and exists in order to force a holder to exercise once the share price typically reaches $18. Roughly half of the SPAC warrants issued during the last 18 months have also included a second soft call, with a $10 trigger. Both calls are active throughout the life of the instrument. We shall refer to these as the "$18 triggered call" and the "$10 triggered call", where these cash amounts refer to the calls’ share price trigger level.
The $18 triggered call exists to force exercise when the stock price performs well, and the exercise is defined as per the usual exercise rights available to the holder. The $10 triggered call is more complex. In this case the warrants are exercised on a cashless basis – holders pay no exercise price, but instead surrender their warrants for a fraction of the shares they would have received. A pre-defined table of share prices and remaining time to maturity is used to determine the number of shares holders receive (rather like the make-whole replacement shares table for a convertible instrument). This forces holders to exercise on a cashless basis and allow the company to avoid the higher level of dilution a full exercise would result in, but at the expense of foregoing any additional capital injection.
$11.50 exercise price (strike)
(period to expiration of warrants)
Varying volatility and spot price for the warrant with both the $18 and $10 triggered calls active produces the valuation surface, illustrated below. Volatility (%) is assumed flat over the instrument lifetime and the spot price ranges from $8 up to a maximum of $21. Above the $18 spot we observe the expected behavior whereby the fair value is given simply by the spot minus the strike, represented by the perfectly flat plane we see above $18 spot, irrespective of the volatility assumptions. Also, of interest is the flat plane we see above approximately 40% volatility for all spot prices. This corresponds to the capped region in the previous graph and is the impact observed as a direct result of the $10 triggered call.
The final surface below looks at the valuation profile of the SPAC warrant with both calls active as we reduce the time to maturity (three months at a time), varying volatility and using a constant spot price of $10. As expected, throughout the instrument's lifetime, we continue to see this capping effect of the $10 triggered call above approximately 40% volatility.
MODELLING SPAC WARRANTS IN FIS CONVERTIBLE BOND SERVICES
The latest release of our Convertible Bond API Manager incorporates the ability to model a soft-call feature for the warrant instrument. For SPAC warrants where both the $18 and $10 calls exist we believe the results of our analysis demonstrate the validity in modelling the $18 triggered soft call whilst capping the input vol assumption at a maximum 40% as a proxy for the impact of the $10 triggered forced cashless exercise.
The FIS Convertible Bond Data Service has been extended to provide and maintain the terms and conditions data for the SPAC warrants universe. Warrants for those SPACs that are in their pre-acquisition stage of life are modelled using their rolling (typically 5 year) maturity. Once the merger is complete, terms are updated to their known fixed dates.
Author William W. Weichhart, senior analyst, FIS Cross-asset Trading and Risk business. With special thanks to Rhory Ashworth, quantitative developer at Mako Trading, for his contribution to this white paper.
With special thanks to our guest speakers and white paper contributors:
Nikhil Chouguley, Global Head of Product Governance & ESG Oversight, Deutsche Bank.
Benjamin Lamping, Founder, Reframe Capital.
Ulf Füllgraf, Managing Director, Alpha Centauri Investment Management.
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Contact us for a demo or for further information on email getinfo@fisglobal.com
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