Hi Frank, and thanks for that article. Much appreciated.
Exchangeable shares fuel arbitrage action
All JDS shares not equal: Yorkton says 15% gap creates trading opportunity
Paul Haavardsrud
Financial Post
Originally designed to help shareholders avoid a tax hit after a cross-border merger, exchangeable shares have also become a favourite vehicle of hedge fund managers on the lookout for low-risk arbitrage opportunities.
But just because professional traders are involved, that doesn't mean retail investors can't get in on the action.
Indeed, investors holding shares of JDS Uniphase Canada Corp. (JDU/TSE), exchangeable on a one-for-one basis for the U.S. stock, should consider switching into JDS Uniphase Corp. (JDSU/NASDAQ), as the price gap between the two has widened to an unprecedented level, Chris Umiastowski, a Yorkton Securities analyst, advised clients in a research note yesterday.
Although JDS is legally a U.S. company, it trades on the Toronto Stock Exchange as an exchangeable share, created so Canadian shareholders in JDS Fitel could continue to hold their shares without triggering a tax hit after the firm was taken over.
Traditionally, JDU's RRSP-eligibility (exchangeable shares count as a domestic holding) has helped it trade at a premium to JDSU, but recently this spread has grown to more than 15%, a gap that should prompt existing shareholders to consider making a trade.
By selling JDU and reinvesting the proceeds into JDSU, investors will either hold more shares, or the same number of shares with more cash.
The only hitch being that JDS is considered a foreign property and will no longer count as Canadian content in an investor's portfolio, Mr. Umiastowski said.
Yesterday, the stock (JDSU/NASDAQ) closed at US$12.26 in the United States, while the exchangeables (JDU/TSE) ended at $23.50.
Taking into account the exchange rate for the Canadian dollar, the exchangeables are trading at a $4.02 premium. "That spread is always there and will often go extremely wide. We've put it on many times before and just put it on again," said Matthew Wood, a fund manager at Vertex One Asset Management, a Vancouver-based hedge fund.
JDS's size and relative importance to the Canadian market, along with its RRSP eligibility, contributes to the exchangeables trading higher than the U.S. shares, as Canadian investors don't want to be underweight on such an important stock, Mr. Wood said.
Although JDU is among the most liquid of the 20-odd exchangeables trading on the TSE, some institutional investors may still have trouble taking advantage of the trading opportunity. However, retail investors, who don't need to worry about crossing large blocks of shares, shouldn't have any trouble executing the trade. |
