The Picton Mahoney Fortified Arbitrage Alternative Fund Cl F returned 0.46%, and Picton Mahoney Fortified Arbitrage Plus Alternative Fund Cl F returned 0.10% in the first quarter of 2023.
After a steady January and February, we didn’t escape the volatility of March unscathed. The biggest detractor from performance this quarter was our position in First Horizon Corp (FHN), a US$10BN market cap regional bank based in Memphis that is being acquired by TD Bank (TD) for US$25 per share. A common theme of these quarterly updates has been the extended regulatory reviews we’re seeing in mergers in the US. Bank mergers have been especially affected and we’re now into the 14th month of the FHN/TD deal. In early March, TD advised FHN that they had been informed by the regulators that the approval was unlikely to be granted in time for deal’s termination date in late May. While TD is making comforting statements about how committed they are to the deal, the market is well aware that they have considerable leverage to renegotiate the price or walk away after May (if the deal hasn’t closed). Of course, March also saw a regional banking crisis in the US and so the downside in the event of a deal failure also deteriorated. Fortunately we had sold about 1/3 of the position before the crisis, but nevertheless the position cost us about 55bps of performance (unlevered).
Merger and Acquisition (“M&A”) volumes were healthy in Q1, with 48 deals totaling US$153 billion in target market capitalization announced in Q1. In general, arbitrage deal yields remain high, reflecting the higher interest rate environment, and some spreads are very wide due to the continued regulatory uncertainty. We find M&A deals with stock consideration to be particularly attractive as our rebate on short proceeds is generally more advantageous than our US competitors. Our biggest gainers in the quarter were Activision Blizzard Inc. (progress on EU/UK regulatory approvals) and Shaw Communications Inc. (Minister Champagne’s approval came at the end of the quarter with deal closing in early April).
There were 11 new special purpose acquisition corporation (“SPAC”) issues in Q1 compared to 73 liquidations and 28 completed business combinations. Many other SPACs secured extensions, with many shareholders redeeming at the time of the extension. Needless to say, the size of the SPAC market continues to shrink rapidly and now sits at about US$50 billion down from a peak of approximately US$180 billion. Yields in SPAC commons are averaging just over 6% which we continue to see as attractive given the low-risk and capital gain treatment, with some upside opportunities. New issues are priced with stronger warrant coverage, high starting cash-in-trust, and shorter maturities resulting in new issues yields closer to 9%.
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