IVH: the merger with ACP is positive for the fund (NYSE: IVH)
On August 11, the Delaware Ivy High Income Opportunities Fund (NYSE: IVH) announced that its board of directors had approved the reorganization of the fund into Aberdeen Income Credit Strategies Fund (ACP). According to the announcement:
It is currently expected that the reorganization will be completed in the first quarter of 2023 subject to (I) the approval of the reorganization by the shareholders of the Acquiring Fund, (II) the approval by the shareholders of the Acquiring Fund of the issuance of shares of the Acquiring Fund, and (III) the satisfaction of customary closing conditions.
In fact, a number of Delaware Management Company closed-end funds (“CEFs”) are taken over by Aberdeen:
If we look at the chart above, we will notice that most of the Delaware Management Company CEFs are quite small and they all trade at discounted prices relative to NAV. In fact, this is a systemic issue with this asset manager, where external parties have managed to arbitrate this negative market view of the asset manager. To that end, we witnessed a successful proxy fight by Saba Capital Management, LP, a hedge fund, which forced a Delaware fund to start buying stocks at a discount:
Saba Capital Management, LP and certain related parties (collectively “Saba” or “we”) announced today that it has entered into an agreement with Delaware Investments National Municipal Income Fund (NYSE: VFL) (the “Fund”).
Under the terms of the agreement, the Fund will launch a substantial cash tender offer for up to 50% of the outstanding common shares of the Fund at a price per share equal to 99% of the Net Asset Value (“NAV”) of the Fund by (the “Tender Offer”). The Fund will repurchase the shares tendered and accepted under the tender offer in exchange for cash. In exchange for the tender offer, Saba agreed to certain customary standstill provisions.
In terms of IVH and the implications for its shareholders, we generally view this decision as positive. IVH changed managers very recently, with Delaware/Macquarie announcing the completion of its acquisition of Waddell & Reed Financial and IVH in April 2021. Rather than being merged into a much-loved market platform, IVH was transferred to a manager of assets that has seen consistent discounts in the market for its CEFs. To this effect, the discount compared to the NAV for IVH persisted after the acquisition:
We can see from the chart above that the market is looking favorably on the announcement of the ACP merger with a very sharp tightening of the discount to NAV. The remaining obstacle is that the shareholders of the two funds approve the merger. It is clear that IVH shareholders will benefit significantly, and we believe that ACP shareholders will also benefit. Higher assets under management are always positive for a fund as it will give them more latitude in primary allocations, cheaper cost of funds and greater market preeminence. ACP will essentially double its AUM if the IVH merger goes through.
ACP, on the other hand, has recently traded at premiums to NAV:
While the ACP only saw the premiums from 2021, its historical discount to the NAV is much lower than that observed in the IVH (around -5% for the ACP against -10% for IVH).
Delaware Management Company and Aberdeen are aware of the synergies according to their press release:
The combination of the merged funds will help ensure the viability of the funds, increasing scale, liquidity and tradability changes which may lead to a tighter discount or premium to net asset value over time. As a result of the reorganizations, shareholders of each Acquiring Fund will experience an increase in assets under management and a reduction in the total expense ratios of their Fund. No changes are proposed to the current objectives or policies of the Acquiring Funds as a result of these reorganizations, including the monthly distribution policies of the Funds. Individually, each board believes that the reorganizations are in the best interests of their fund’s shareholders, given the strategic objective of creating scale for the benefit of shareholders.
Ultimately, we don’t know if we’ve seen the widest credit spreads of the year, so another drop in credit conditions could still occur. However, we believe the merger will go through and this is a positive for IVH shareholders who will see themselves migrated to a platform that traditionally traded at a premium to net asset value. In a year’s time, while we can say that fundamentally the market will have already priced in a recession, we believe the merger will be successful and IVH (then ACP) will see a premium to NAV for its stock.
Composition of the guarantee
IVH and ACP are high-yielding CEFs that focus on the riskiest debt securities:
In accordance with the acquisition statement, the current objectives of the funds will not change and we see similar collateral compositions here.
It is proposed to acquire a number of CEFs from the Delaware Management Company by Aberdeen Funds. The IVH is to be merged with the ACP if approved. Both are high-yielding CEFs that focus on the riskiest elements of the capital structure (unique “B” and “CCC” credits). The market reacted immediately, with the IVH discount on NAV narrowing to a -2.84% level not seen in nearly five years. ACP, on the other hand, is currently trading at an 11.7% premium to NAV. We believe that the merger will materialize and that it will represent a positive element for the shareholders of IVH. Expect lower cost of funds, synergies and better liquidity. The best way to trade this announcement now is to wait for another risk free fight when the discount on NAV for IVH widens again and starts accumulating stock with a view that once merged IVH will be trading at a premium on NAV as a new ACP. and from a fundamental perspective, higher recessionary default rates will already be priced into credit spreads.