- The credit strength of companies shouldn’t be impacted if they’re forced to restate their financials because of the way they accounted for warrants in a special purpose acquisition company (SPAC) transaction, a Moody’s analysis says.
- Because it’s only an accounting issue that’s causing the restatement and not a breakdown in process or internal controls, there’s no credit impact that would necessarily concern investors, according to the Moody’s Investors Services sector comment.
- The restatements, Moody’s says, “provide little value to credit analysis and are only marginally credit negative.”
The restatements stem from a staff memo the Securities and Exchange Commission released in April that questioned the long standing practice of SPACs accounting for warrants as equity rather than as a liability.
SPACs are publicly traded shell companies that use their investment funds to capitalize a private startup and take it public without it having to go through a traditional IPO. To attract investors, SPACs typically attach warrants to their initial equity shares, which enable early investors to increase their holdings post-merger.
The SEC memo said the warrants should be treated as a liability because the company is on the hook if it’s forced to redeem the warrants for cash. Given that risk, the company needs to value the warrants’ market value every quarter, using an expensive and complicated process, unlike if the warrants were treated as equity, which only need to be valued once, upfront.
A restatement could be necessary for a company that has already merged with a SPAC — what's known as the de-SPAC stage — and if it accounted for the warrants as equity in its previous filings.
Moody’s calls the switch to classify the warrants as a liability a theoretical accounting exercise; as a practical matter, there’s little likelihood of the warrants being redeemed for cash absent a major change in the company’s ownership structure, and that possibility has already been factored into the SPAC transaction’s original credit analysis.
“Contingencies such as these are incorporated into the initial risk of the de-SPAC entities' capital structure,” Moody’s says. “We do not believe this specific issue is in any way indicative of a governance issue at the de-SPAC entities or predictive of future material misstatements because of a lack of management quality or experience.”
As a result, companies at the de-SPAC stage that must restate their financial reports because of the SEC’s change in policy shouldn’t face a penalty in credit markets because of that change.