EXD - EXD: Merger Approved Watch Out For Arbitrage Opportunities

2023-03-21 04:31:45 ET

Summary

• EXD is set to be merged into ETV.
• On March 16 the Eaton Vance Tax-Managed Buy-Write Strategy Fund approved an Agreement and Plan of Reorganization.
• On April 14 the EXD ticker is set to be retired, with shareholders receiving shares in ETV.
• While the current premiums to NAV for the two CEFs are very similar, any divergence of +/-2% can be pursued as a nice merger arbitrage opportunity.
• We are entering a period of increased volatility, with macro events (such as the regional banks' crisis) taking center stage. Volatility brings opportunity.

Thesis

We have written articles about this merger before , the last one describing the postponement of the merger due to the inability of the manager to secure all necessary votes. In that article we said:

EXD is set to be merged into ETV. Unfortunately, Eaton dropped the ball on the scheduled meeting and securing the necessary votes, with the special meeting now postponed to March. We feel the merger will eventually go through, and the market is telling us a similar story, with the two CEFs having very similar premiums to NAV.

And indeed Eaton did what it had to do in order to push this corporate action through:

BOSTON, March 16, 2023-At a Special Meeting of Shareholders held today, shareholders of Eaton Vance Tax-Managed Buy-Write Strategy Fund (EXD) (the "Fund") approved an Agreement and Plan of Reorganization pursuant to which the Fund will be reorganized with and into Eaton Vance Tax-Managed Buy-Write Opportunities Fund (ETV) (the "Acquiring Fund") (the "Reorganization"), as approved by the Fund's Board of Trustees.

The Reorganization is currently expected to be completed as of the close of business of the New York Stock Exchange on or about April 14, 2023, subject to the satisfaction of customary closing conditions. Each shareholder of the Fund will be issued common shares of the Acquiring Fund at an exchange ratio based on the Fund's and Acquired Fund's respective net asset values per share. Following the Reorganization, the Acquiring Fund will continue to be managed in accordance with its existing investment objectives and strategies.

What does this mean? It means that after April 14 the Eaton Vance Tax-Managed Buy-Write Strategy Fund, EXD ticker will be retired, and EXD shareholders will receive shares in Eaton Vance Tax-Managed Buy-Write Opportunities Fund, ETV. Going forward an investor should think about the two funds as being fungible.

Fungibility means that any divergence in the premium/discount to NAV can be traded. We are living through very volatile times, with Credit Suisse being taken over by UBS and regional banks continuing to be under pressure. Equity buy-write funds have fared fairly well so far, insulated from a specific sector gap-down as seen in financials.

We have seen an interesting bifurcation in the merger arbitrage CEF space - the ACP/IVH merger saw a very wide arbitrage persist until the merger date (i.e. arbitrage in excess of 6%), while the ETV/EXD one has been much more muted. We feel the high yield space suffers from illiquidity and wide bid/ask spreads, hence the presented opportunity, while equity buy/write funds are better pinned from a valuation standpoint, hence the current observed tightness.

Volatility sometimes brings opportunity, and any block trades in any of the two CEFs can bring about substantial merger arbitrage opportunities. An investor needs to closely monitor these two CEFs for the next three weeks.

Premium/Discount to NAV

Since the initial announcement these two CEFs have traded fairly closely in terms of premium to net asset value:

The current market is a very volatile one, and opportunities might arise in terms of a divergence of premiums/discounts. Watch closely these funds until the actual share merger, because any divergences higher than 2% should be traded.

Performance

So far this year the funds have outperformed the index:

We can see how ETV and EXD have had an almost identical performance, outperforming the index. On a 1-year basis the story is more nuanced, with EXD faring better:

Conclusion

EXD is finally set to be merged into ETV. After an initial failed attempt, Eaton has finally secured the necessary votes to move forward with the corporate action. The EXD ticker is set to be retired after April 14, with current fund shareholders receiving ETV shares. The two CEFs have seen their premiums trade in tandem in the past months with the market assigning a high probability to the merger being successfully completed. We are currently experiencing history in the making, with a systemically important bank in Credit Suisse being taken over, and several U.S. regional banks having been taken over by the FDIC. We expect volatility to persist. Volatility can bring unwarranted distortions in the prices of the two CEFs, hence a retail investor looking to take a position here should watch these two CEFs closely for any merger arbitrage opportunities (we view a divergence of 2% or higher in the premium to NAV as an trading opportunity).

For further details see: