SPAC Extension Financing
Frequently Asked Questions
What is extension financing?
When SPACs near the end of their duration, they generally are required to commit additional capital into the trust to extend their deadline. Many SPACs will turn to external sources of capital to provide extension financing.
How is extension financing structured?
While structures vary, generally we have seen short duration debt instruments with a sizable equity or equity-linked component with value protections, such as redemption.
Do sponsors give extension finance providers a portion of their equity carry in the SPAC?
It is not typical, but depending on how the extension financing is structured, the sponsor may have to provide the investor with a portion of their equity carry.
What happens if the SPAC cannot complete a transaction and liquidates?
If a SPAC cannot complete their transaction, the proceeds of the trust are returned to investors. Therefore, the extension financing provider will have no ability to collect on their investment.
At what point in the business combination process can a SPAC raise extension financing?
Extension financing can be raised by a SPAC very early in the business combination process, as early as a signed definitive agreement. Extension financing is typically less costly once the minimum cash requirement is met (e.g., PIPE or other financing is under contract) and transaction details are finalized.
Is the extension financing secured by the company merging into the SPAC?
Generally, the SPAC obtains the extension financing, although there can be exceptions. Typically, the extension financing is repaid at the time of the business combination, out of the transaction proceeds. Any post transaction costs or other related liabilities are the responsibility of the post-merger combined entity.
Who provides extension financing?
Extension financing is typically provided by hedge funds, family offices, and other opportunistic capital sources.