Liberty TripAdvisor Holdings (LTRPA) – Capital Structure Arbitrage – Upside 10%-20%+

Current Premium: 20% (LTRPA at $2.01 and TRIP at $24.2)

Target Premium: -15%

Upside:  20%+ (depending on hedging ratio used)

Expiration Date: TBD

 

This is an interesting and potentially very timely situation. Plenty of cheap shortable shares are available on IB for this arbitrage.

We already had a similar situation last year, and please refer to this LTRPA post for full background.

Liberty TripAdvisor Holdings (LTRPA) is a tracking stock for Liberty’s 29.2m shares in TripAdvisor (57% voting power and 22% economic value). Tracking stocks often trade at a small discount to their NAV and theoretically LTRPA should be no exception, especially due to the levered balance sheet of the holdco. Last year, after the debt recapitalization and post-COVID travel stock hype, the price of TRIP was pushed upwards and LTRPA started trading at a wide (30%-40%) discount to its NAV. This time, the dynamic is reversed – due to the recent Russian/Ukraine war and related flight bans, travel stocks have tumbled over the past week. The biggest move happened yesterday and the combined dynamics of the falling TRIP price and high LTRPA leverage pushed the tracking to 20%+ premium o its NAV (see chart below). Historically, this has happened several times before and was also related to large volatility in TRIP shares – the premium always got quickly reversed to discount. We expect a similar outcome again – the current premium will turn to discount in the coming days/weeks.

Note: for the valuation of preferred shares, which need to be deducted before arriving at LTRPA NAV, we use the current price of TRIP rather 10-day average. This provides a more accurate picture of today’s premium/discount. Using the official NAV calculation would result in an even more excessive 33% premium.

The difficult part here is hedging and the dynamics of it. There were some discussions on that in the previous LTRPA write-up (see snowball’s comment as of the 27th April’21). We think it makes sense to use the embedded leverage ratio here and at current levels, LTRPA NAV sensitivity to TRIP share price stands at around 4x, meaning that 1% change in TRIP price causes 4% change in LTRPA NAV. This ratio will shift with moving TRIP share price. So at the current levels for every $1 LTRPA short, $4 should go to TRIP long to have a hedged exposure.

Overall, this seems like an attractive short-term setup that is likely to evaporate quickly. Similar to what was mentioned last year, the idea exists mainly because of hedging peculiarities, as well as LTRPA being a micro-cap tracking stock with a complex balance sheet.

Other points worth mentioning:

  • There’s a risk that TRIP shares will just keep falling to the point where LTRPA NAV turns negative (would happen at around $18/share TRIP price). In this case LTRPA will still continue to trade above zero (kind of out of the money equity stub) and the whole arbitrage breaks.
  • Due to high leverage, NAV sensitivity might change dramatically at different levels of TRIP share price (especially to the downside). Hedging ratios required at different TRIP share price levels are indicated below:

11 COMMENTS

  1. blades

    I like the idea. Could not get a fill on IB for my LTRPA short sale, even hitting the bid. Experimentally I put in a price below the bid, still infilled. Anyone else have this problem?

    1. RH

      LTRPA is subject to a short sale circuit breaker today, so you can’t get short by hitting the bid.

    2. dt

      On Rule 201:

      Among other things, Rule 201 requires that a trading center establish, maintain, and enforce written policies and procedures reasonably designed to prevent the execution or display of a short sale order of a covered security at a price that is less than or equal to the current national best bid if the price of that covered security decreases by 10% or more from the covered security’s closing price as of the end of regular trading hours on the prior day. Once the circuit breaker in Rule 201 has been triggered, the price test restriction will apply to short sale orders in that security for the remainder of the day and the following day, unless an exception applies.

      https://www.sec.gov/divisions/marketreg/rule201faq.htm#:~:text=Among%20other%20things%2C%20Rule%20201,if%20the%20price%20of%20that

  2. Ilja

    14% still remains at yesterday’s closing prices. Regarding question on NAV calculation:

    – LTRPA owns 29.25m TRIP shares = $724m
    – Net debt: $371m holdco debt + $37m holdco cash + $255m Certares redeemable prefs = $589m. Prefs are calculated based on the $1000 nominal amount per share multiplied by an accretion factor. Accretion factor is calculated as 80% of the growth of TRIP shares above $17.08. The growth is calculated as 10 last days VWAP. However, as Certares prefs won’t get redeemed for a few years yet, VWAP calculation skews the calculation if TRIP volatility is elevated in the last 10 days. So instead, we calculated the value of preferreds based on the current TRIP price. As of the latest 10K, 187.414m pref shares were outstanding. So Certares prefs are: (1+(0.8*(TRIP-17.08)/17.08))*187.414
    – LTRPA has 72.4m Series A shares and 3.2m Series B shares (voting shares). B has extremely low float and liquidity and for some reason trades significantly above A shares. Here we just assume that both A and B shares trade at the same price ($2.04/share right now).
    – LTRPA NAV is $135m or $1.79/share. If calculating prefs based on 10 TRIP VWAP instead of just the current price, NAV stands at $120m or $1.58/share.

    Hope this helps. Added the NAV/share column to the NAV sensitivity table in the write-up as well.

  3. dt

    We are closing LTRPA/TRIP arbitrage case. Travel stocks have followed the overall market rebound and as expected the LTRPA premium/discount situation has reversed. LTRPA currently trades at 12% discount to NAV compared to 20% premium at the time of posting.

    The hedged position ($4 of long TRIP for every $1 short LTRPA) has delivered 36% return over the month if calculated on the initial value of LTRPA short position and 10% return if calculated on the initial value of TRIP long position.

    4
    1. dt

      Genuine question – how are the % returns in similar cases calculated by industry pros? What should be considered to be the correct approach?

      1
  4. AV

    There are many options, but assuming that you don’t want to deal with assumptions about margin usage/cost of capital for funding and things like that the easiest approach would be: profit/notional exposure (long+short).

    Disclaimer: I don’t consider myself an industry pro.

  5. dph

    LTRPA always interesting when its below a buck and TRIP is above 22. It appears LTRPA likely has a floor near fifty cents give or take based on optionality .

  6. dav

    Best play here was NEOG puts back when everyone thought they were getting free money. Pretty predictable that many would run for exits once they got their conversion.

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