ASGI - CEF Merger Arbitrage: Sell ACP And Buy IVH

Summary

• ACP is overvalued heading into its merger with IVH.
• Potentially make 10% in two weeks by selling ACP and buying IVH.
• One risk is that their NAV profiles diverge.

Author's note: This article was released to CEF/ETF Income Laboratory members as part of our CEF Weekly Roundup on February 6, 2023, with certain numbers updated.

Merger arbitrage in abrdn/Delaware CEF mergers

The mergers of four Delaware funds into the abrdn funds are slated to be completed in about 2 weeks' time, on March 10, 2023 (press releases here and here ). We have previously discussed the mergers in a previous CEF Weekly Roundup .

Because the mergers are on a NAV-to-NAV basis, it makes sense to buy the cheapest of every group of funds undergoing consolidation, regardless of whether it is the acquiring fund or the target being acquired.

• abrdn Income Credit Strategies Fund ( ACP ) will acquire Delaware Ivy High Income Opportunities Fund ( IVH )
• abrdn Global Dynamic Dividend Fund ( AGD ) will acquire Delaware Enhanced Global Dividend and Income Fund ( DEX ) and Delaware Investments Dividend and Income Fund, Inc. ( DDF )
• abrdn Global Infrastructure Income Fund ( ASGI ) will acquire Macquarie Global Infrastructure Total Return Fund ( MGU )

We have created a Corporate Actions Tracker page for Income Lab members to help them keep track of CEF corporate actions (i.e. rights offerings, tender offers, mergers, liquidations, are announced). A screenshot of from our tracker page is reproduced below:

Sell ACP and buy IVH

We can see from the tracker that the spread between the acquiring fund, ACP, and the acquired fund, IVH still remains very wide at +10.92%.

This means that those own ACP should buy swap to IVH. We bought IVH in our Tactical Income-100 portfolio at the end of last year to take advantage of this discount spread.

Our position is nicely in profit since that trade, but there may still be further gains ahead.

The reason is that the discount spread between ACP (at a +10.92% premium) and IVH (at a +0.59% premium) is expected to close to zero in two weeks' time, when IVH is acquired by ACP. Whether this occurs as a result of ACP's premium coming down, or IVH's premium rising higher (or some combination of the two) remains to be seen.

Nevertheless, holders of ACP should switch to IVH and capture the 10% premium spread between the two funds, which is a massive spread given that the merger is only two weeks away.

One risk of this trade is that the NAV profiles of ACP and IVH may diverge over the next two weeks. While both are high-yield fixed income funds, ACP runs a "junkier" portfolio than IVH. Thus, if markets were to shift back into risk-on mode, ACP could outperform IVH at a NAV level, negating some or all of the anticipated benefit from the discount spread closing.

Summary

Holders of ACP should sell ACP and buy IVH to take advantage of the 10% premium spread between the two funds which should close by March 10, 2023 when ACP acquires IVH.

For further details see: