WATCH: CMNIX’s Eli Pars on the ‘Extra Kiss’ SPACs Can Provide

A second arbitrage opportunity with a risk profile that’s similar to convertible arbitrage and capable of providing “an extra kiss”—that’s how Calamos Co-CIO and Senior Co-Portfolio Manager Eli Pars describes the Calamos Market Neutral Income Fund’s use of Special Purpose Acquisition Corporations (SPACs) in a new interview with Calamos Executive Vice President and Chief Distribution Officer Robert F. Behan.

TRANSCRIPT

As Pars explains, the CMNIX team gravitated to the strategy in the last year as SPACs have enjoyed new popularity as a means of funding acquisitions. The fund’s board recently expanded its authority to invest up to 10% in the strategy from its previous limit of 5%. As of 9/30, the strategy represented 4.5% of the fund.

“We like to buy SPACs at the $10.00 issue price or lower. At these prices, we don’t feel like there is a lot of downside other than the risk related to the time value of money,” explains Pars. “We can participate in the upside optionality of the stock if the SPAC does a good deal. There’s also the theoretical cheapness of the structure, with the shares and warrants paired together. The warrants could be $0.40 to $0.50 of value on a $10.00 SPAC.

“So, we’re just trying to create those cheap options and then trade the book around. Ideally, we’re buying SPACs at $10.00 or less, and trading out of them at $10.50 or $11.00. With this sort of strategy, we think we create a risk/reward profile that’s pretty similar to what we’re getting from the fund’s convertible arb strategy.”

Pars provides an update on the marketplace since he last commented on SPACs in August (see this post), including:

• Some issuers have been overfunding the trust. “Instead of $10.00 at maturity, you can get $10.10 or $10.20, which is real money. When you’re talking about the returns of Market Neutral, which is a 3% to 5%-type strategy, that extra kiss there is helpful.”
• The amount of warrant coverage has increased some.
• Some issuers have shortened the terms from 24 months to 18 or even 12.
• There have been opportunities to buy below $10. “We’ve had success buying some SPACs that haven’t traded well on day one, [enabling us to buy] at $9.85 or $9.90.”

He makes a distinction between CMNIX’s interest in SPACs versus de-SPACs. Once a SPAC announces and closes on an acquisition, the closing is called a de-SPAC. “At that point, it’s a small cap equity with a very different risk profile than what we’re looking to do in the fund,” he says.

Some of those deals can be profitable and trade much higher than $10. “That’s not the kind of volatility we’re looking for, we would have been out at $11,” Par says. “You could look at it and say, ‘Wow, you could have ridden it all the way up.’ But that’s not what we’re trying to do with this strategy. We’re trying to create cheap options with very minimal equity risks.”

The use of SPACs is the latest example of the fund’s use of opportunistic strategies over its 31 years, Behan notes, and reflects the team’s desire to  continually add value.

Agreeing, Pars says, “This is really driven because we think we can make money at it…It does offer the benefit of allowing us to invest money in a different asset class. But that’s not the motivation behind it.

“The motivation behind this,” he continues, “is to make money. We think that if we sat down with every investor and walked them through how we’re doing SPAC trades, they’d look at it and say, ‘Yeah, I want you to do that.’”

Investment professionals, for more information on CMNIX’s use of SPACs or its convertible arbitrage or hedged equity strategies, contact your Calamos Investment Consultant at 888-571-2567 or caminfo@calamos.com.