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: