FSD - FSD: The Merger Arbitrage Opportunity Is Quasi Extinguished

2024-02-06 13:07:39 ET

Summary

• ACP shareholders have approved the merger with FSD, with FSD shareholders expected to follow suit in a formality vote.
• The discount to NAV for FSD has significantly narrowed since the merger announcement.
• Once the merger is operationally completed, FSD equity-holders will receive ACP shares.
• The "easy money" from the merger arbitrage trade has already been made, and continuing to hold FSD shares now will result in a higher credit risk profile.

Thesis

First Trust High Income Long/Short Fund ( FSD ) is a fixed income closed-end fund focused on high-yield corporate bonds. We have covered this name before, but more importantly we covered it in the context of the abrdn Income Credit Strategies Fund ( ACP ) merger, which we discussed here in October. In our article, we stated the following:

FSD is the credit CEF from First Trust which is set to be absorbed by ACP, and FSD is currently trading with a much larger discount to NAV when compared to the abrdn fund. We expect the merger to be completed and the FSD shareholders to benefit from a lower discount to net asset value. FSD's collateral, while below investment grade, is much better rated than ACP's (ACP has a significant concentration in CCC assets).

With significant macro risks abounding we feel the appropriate trade for this corporate action is to 'wait out' the merger in FSD given its conservative build and larger discount to NAV. We are therefore of the opinion that ACP shareholders should Sell ACP here and Buy FSD on the back of this corporate action.

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