Trinity Merger Corp. (TMCX), announced their combination with Broadmark on Monday, and also included in the filed documents was a proposed amendment to the warrant agreement.  However, how the way the language was worded was very confusing. Plus, the proxy statement where you could find this information was filed under “Trinity Sub Inc.“, which wasn’t immediately apparent.  Nonetheless, now that we have some clarity, let’s discuss what’s going on.

Since the Trinity combination with Broadmark will result in the company being a REIT post-closing and issuing a dividend is required to maintain REIT status, the new company will be issuing a dividend in the expected amount of $1.31 in 2020.  However, as a result of that dividend, Trinity would like to remove certain anti-dilution provisions contained within the warrant agreement relating to the payment of cash dividends.  Specifically, this is because the current anti-dilution adjustment goes into effect when dividends are paid in an amount that exceeds $0.50 per share and Broadmark expects to pay $1.31. So, if this waiver isn’t passed, what would happen is, every time Broadmark were to issue a dividend, the warrant would be re-struck.  And since that strike price would continually get adjusted downward, well, that results in a lot of continuous dilution to the common shareholders and consequently, you get a lower share price. Essentially, the anti-dilution provision makes a combination to become a REIT a bit of non-starter, so Broadmark made the waiver a condition to closing.

In order to pass this waiver proposal, Trinity/Broadmark needs 65% of public warrant holders to consent to remove the anti-dilution provision. However, as we all know, warrant holders aren’t going to just waive this without some sort of compensation.  So, Trinity/Broadmark is offering $0.30 to warrant holders that “EARLY” consent or $0.15 to warrant holders that “LATE” consent.  Here’s where it gets a little tricky ….there are going to be two deadlines – the Early Consent Deadline and the Expiration of the Consent Solicitation Deadline. If a warrant holder consents by the Early Consent deadline, they will get the $0.30, but they only need 65% of warrant holders to consent. If you consent after the Early Consent Deadline but before the Consent Solicitation Deadline, those warrant holders only get $0.15. However, in both cases, warrant holders get to keep their warrants.

So basically we have more “game theory” to deal with….especially because REIT share prices typically do not move much due to their continual issuance of dividends (and follow-on offerings).  As a result, that warrant you get to keep is far less valuable since the likelihood of it ever being in-the-money is a lot less probable. To be sure, the warrant will still have some value, but without that anti-dilution adjustment, it’s worth a whole lot less.  So back to game theory, let’s say you do not want to consent at all and you think other warrant holders feel the same way, but you’re not sure.  You have to decide if you think at least 65% of warrant holders in total (Early or Late) ARE going to consent resulting in the waiver passing. You can’t just wait it out until AFTER the Early Consent deadline to see how many consented early, because if enough do consent early, you’ve missed the boat and you’re stuck with the late payment of only $0.15, not $0.30, and no anti-dilution adjustment (This assumes you’ve “Late” consented.  If you do not consent at all, you still get to keep your warrant, but you do not get ANY payment. $0.00). This makes warrant holders highly motivated to consent early.

The question is, is $0.30, plus keeping the warrant, enough to get warrant holders to consent?  Is that price “fair”? Or, is there a possibility more than 35% of warrant holders DO NOT consent?  Well, there are 34.5 million public warrants and 35% of those warrants equals 12,075,000….so if 12,075,001 do not consent, not only does the waiver not pass, but the deal doesn’t close. It goes bust. Trinity only has three more months left on their clock, so in the event of a failed deal, they would need a whole lot of new time extensions to go out and find another deal and close it.  It would be far more likely that Trinity would have to liquidate and then nobody wins.  In that case, instead of warrant holders only getting $0.15 or $0.30 and keeping the warrant, they get zero since the warrants get cancelled in the event of a liquidation.

Warrant holders don’t want that either.  Something is better than nothing, so all things considered, it is far more likely that warrant holders will consent, and preferably, consent early to get that $0.30.  Checkmate.

SPACs….always keeping things interesting.

The consent dates have not been set yet, it’s still early days, but look for additional updates as more documents get filed.