Description

This is a relatively simple arbitrage situation stemming from the merger of Sirius International Insurance and Third Point Reinsurance which closed in 2021 and created Siriuspont (SPNT).

At the time of the merger, investors had the option of electing to receive a Contingent Value Right (“CVR”) maturing on the second anniversary of the transaction: February 26, 2023.  The CVR will pay out cash proceeds equivalent to 13.73 less .743 times the price of SPNT common stock.  The CVR was listed and trades under the ticker symbol SSPCF.

At the Effective Time, the Company entered into a contingent value rights agreement (the “CVR Agreement”). Pursuant to the CVR Agreement, the Company issued CVRs representing the right to receive a contingent cash payment of (1) in the case of acceleration upon certain breaches of the CVR Agreement, $13.73 minus the volume weighted average price of the Company Shares measured over the 14 consecutive trading day period beginning on the date a breach is declared, multiplied by 0.743, (2) on the second anniversary (the “Maturity Date”) of the Effective Time, $13.73 minus the volume weighted average price of the Company Shares measured over the 14 consecutive trading day period prior to the Maturity Date multiplied by 0.743 and (3) in the case of redemption by the Company prior to the Maturity Date, the discounted present value of $13.73, discounted from the Maturity Date to the last day of the 14 consecutive trading day period beginning on the date of the redemption notice (“Redemption Valuation Period”), minus the volume weighted average price of the Company Shares measured over the Redemption Valuation Period multiplied by 0.743.

At current prices of 5.92 for SPNT and 8.85 for SSPCF the two securities create an arbitrage at a 3.8% gross yield and a 20% annualized yield with 69 days left until maturity.  The trade is constructed by purchasing .743 shares of SPNT for each share long SSPCF.  Note that in this situation one creates the arb by purchasing both of these securities long because SSPCF itself serves the function of the short leg.

There is extremely low risk that the transaction does not close.  With approximately 5 million of the CVRs outstanding the total cash outlay to satisfy the CVR at today’s prices is slightly less than fifty million dollars.  As of third quarter SPNT had a balance sheet with $2B of equity, $650MM of unrestricted cash, and $5.7B of investment holdings.  Thus, payment is not a major balance sheet event for the company.  This is not an optional payment but a contractual obligation pari pasu to unsecured debt.  SPNT is hardly a stellar insurance company but it is rated A- by AM Best, S&P, and Fitch.  With only 69 days to go, the probability of a major balance sheet hole emerging in their book which would limit $50MM of balance sheet flexibility is de minimis. 

Catalyst

Wait until Feb 23