Description

Trade: Go long 1 unit of AAA.NA at $42.80 and short 0.8894 shr of ATH at $50.65. I just executed at these prices concurrently.

This is an attractive arbitrage idea. +6.35% (versus long $ amount) over the next 7 months with no risk that I can imagine. As well, the arb has a very good chance of closing sooner than 7 months.

The volume on the long side (AAA.NA) is limited although we have been averaging about $200k of buying per day. So it is approproate for smaller funds only.

Basics:

  -- The only asset AAA.NA owns is shrs in ATH. Note that the managing partner (Apollo) gets a carry on the shares. This carry is only on a fraction of the shares and is based off a strike price near $10 per Athene shr. The delta is 88.94% ATH shr per AAA.NA shr.

  -- AAA.NA's ATH shares are locked up shrs. 1/3 are 225 days. 1/3 are 365 days. 1/3 are 450 days. These lockups are from Dec 9, 2016. As of today, this is an average of 8 months.

  -- AAA.NA has stated many times that they will distribute the ATH shrs as the lock-ups expire and then shut down promptly. Note that they need no permission from Athene to do this. This is why the "deal risk" here is almost zero.

  -- ATH shares are easy to borrow, and I have found borrow rate as low as 1.3%. The borrow cost is 1.3% * 88.94% * $50.65 * 7/12 = 34 cents.

  -- the prices I am using were done with trades conducted concurrently as both Amsterdam and US exchanges open. ATH is fairly non-volatilie, but I adjust the risk accordingly to leg into trade.

  -- AAA.NA will freely tell you that they expect ATH will waive the lock-ups and the shrs will be distributed well before an average of 8 months. They are well aware that ATH has traded strongly since its IPO on Dec 9, 2016.

  -- And in fact, they have announced the first such acceleration. 22.5% of the ATH shrs (all from the 225 day lock up bucket) will be distributed as part of a Follow-On Offering. If you do not participate in follow-on offering, the ATH shrs you receive are immediately fungible with your ATH short. So this reduces the average time to "deal close" from 8 months to 7 months. I am assuming the Follow-on offering happens, but it could fail.

  -- Other than their accelerating the ATH distribution, the only other unknown are admin expenses in running and winding down AAA.NA (and a series of other entities). I have spoken with AAA several times and while they will not give a definitive answer, they have told me the plan is to shut the entity down soon after the final distribution (less than a year from now) and that expenses should not be disproportionate to past admin expenses. I have estimated $15mm of expenses, or about 20 cents per shr until closing the entity.

Valuation:

As of 12/31/16, the FV of AAA.NA unit was $40.58 vs ATH = $44.49. Note that ATH closed at $47.99, but they use a 7.3% discount factor for the lock up.

At a delta of 88.94%, the current ATH price of $50.65 translates to a Dec 31, 2016 FV of $46.06.

But we need to subtract admin costs (20 cents) and borrow costs (34 cents) to arrive at true FV of $45.52.

Versus the actual $42.80 --> +6.35% for an average holding period of 7 months and almost no risk that I can imagine.

Risks:

- If I had to list risks, it would be that borrow in ATH goes away, but there is no shortage of borrow that I have found.

- Some massive fraud: AAA.NA does not actually own shrs of ATH

Catalyst

There is a built in catalyst as the lock-up periods expire.

Plus, there are possible accelerating catalysts as ATH waives the lock-up periods.