Malaysia becoming a haven for SPACs

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Three SPACs have thus far been listed on Bursa Malaysia. SPACs are given three years to secure a qualifying asset, or 90% of IPO proceeds must be returned to investors.Three SPACs have thus far been listed on Bursa Malaysia. SPACs are given three years to secure a qualifying asset, or 90% of IPO proceeds must be returned to investors.Three SPACs have thus far been listed on Bursa Malaysia. SPACs are given three years to secure a qualifying asset, or 90% of IPO proceeds must be returned to investors.

By Zhen M

Special purpose acquisition companies (SPACs) were popular among investors in the United States a decade ago but had more or less fizzled out completely in recent years. South Korea had its brief SPAC run in 2010. With three SPAC listed and another four hopeful of a listing by year-end or early next year, is Malaysia the next fertile ground? And how long will the run last?

For a start, Malaysia is one of the very few markets with proper SPAC guidelines, arguably the only other market in Asia other than South Korea.

When Hibiscus Petroleum Bhd went public in July 2011 – the first SPAC to be listed in South East Asia – the market was understandably wary of and probably a tad confused with this unfamiliar new investment class sporting a high-risk, high-reward image.

It was quiet for some 18 months, and then the buzz began. April 2013 saw the listing of the country’s second SPAC, CLIQ Energy Bhd, followed by the third, Sona Petroleum Bhd, in July. All three Bursa-listed SPACs are in the oil and gas (O&G) industry. Another O&G SPAC, Matrix Capacity Petroleum Bhd, aims to list by year-end while food and beverage (F&B)-focused, Red Sena Bhd, targets to list by early next year.

Meanwhile, two mining-related SPACs – Australaysia Resources and Minerals Bhd and TerraGali Resources Bhd – which had earlier this year applied to list is said to have hit a snag in their applications for not meeting some of the criteria set by the Securities Commission.

SPACs in Malaysia have come a long way since Hibiscus, whose ability to raise funds was severely hampered due to the then low awareness and interest in SPACs at that time.

RHB Research O&G analyst Danny Chan notes: “Investments in SPACs are gaining traction as investors now understand the SPAC structure. Hence, compared to Hibiscus, the third SPAC was able to garner high interest among investors, which translated into more money raised.”

“It is certainly becoming an alternative investment in the O&G sector as, traditionally, we only have service providers listed rather than pure upstream exploration and production companies,” he adds.

Likewise, Malaysian Chamber of Mines (MCOM) expects SPAC listings to be an avenue to raise capital to kickstart large-scale mining projects in Malaysia, given that raising venture capital for exploration and mining had always been the biggest hurdle in the development of the mineral resources and mining sector in the country.

A SPAC is essentially a shell company with no operations. As it has no assets prior to its initial public offering (IPO), its listing is also referred to as a ‘blank check IPO’, raising funds to acquire operating companies/businesses or assets, termed qualifying assets (QAs), which will then be folded into the company. Once it secures a QA, it ceases to be a SPAC and becomes a regular company.

Malaysian SPACs are given three years to secure a QA, or 90% of the IPO proceeds must be returned to investors.

According to figures from research firm SPAC Analytics, only half of all SPACs launched in the United States in the last 10 years have completed an actual acquisition, and these have posted negative annual returns of 18.6% on average. Nearer to home, SPAC issuance in South Korea ceased after a spurt of listings and surge in prices in 2010, as prices crashed and companies delisted.

As Malaysia learns from these markets, it would arguably fare better.

So far, Hibiscus seems to be doing well, having completed its QA requirement and is now drilling for oil.

“Hibiscus is actually living up to its promise. I think that it has done well to take the single largest risky move to drill for oil in its oil concession,” opines Chan.

However, Chris Eng, Etiqa Insurance & Takaful head of research for investment management, believes that “Hibiscus has to strike oil to truly live up to its promise. Hopefully it does that this year.”

Eng notes that Hibiscus and Sona have garnered quite a bit of attention while CLIQ has been quieter since listing and “needs to step up its activities to source for an asset.”

As for SPACs aiming for a listing, Eng said: “I believe commodity dependent SPACs would have taken a hit with the retracement in commodity prices earlier in the year. While the gold price has rebounded, it may decline again once tapering starts, possibly in September. As such, their outlook remains patchy. O&G SPACs may need to list quickly to avoid any disappointments in the sector either from Hibiscus not striking oil or of clear evidence of Petronas cutting back on spending.”

Eng adds that while SPACs were a nice new asset class earlier this year, especially with their free warrants, they are not standing out right now. “With the current selldown, big caps now look very cheap compared to SPACs.”

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