What Does the Fed Say?

what-does-the-fed-say (For reference, watch the Norwegian phenomenon Ylvis here)

We believe that one unspoken reason why the Fed has prolonged Quantitative Easing is that they still view growth capital as very constrained. Granted, Apple can issue debt at record low rates and there are plenty of headlines about new bond deals in the market but almost every one of these deals is a refinancing or raising money to pay dividends. Very few, if any, are debt deals to finance growth. The market is just not paying companies for growth-related projects and the small-cap market is, for the most part, closed to raising money. With the financing of growth and innovation being central to the American success story, it’s reasonable to assume that the Fed is weary of the lack of support from the private sector. It’s therefore using QE as one method to prop-up small businesses.

Rather than invest in growth projects, the unfortunate truth is that companies are leveraging the future growth of the business to pay dividends today. By refinancing debt at lower rates or raising debt to pay a dividend, the capital savings are being shifted from the debt holder to the equity holder in the form of higher dividends, stock buybacks, and corporate takeovers.

One way for companies to offset this imbalance is through mergers and acquisitions. Companies are resorting to acquiring growth instead of investing in organic growth. With the market not rewarding companies with growth capital, acquiring growth through a corporate takeover is the alternate route. Furthermore, the market is rewarding acquirers. Morgan Stanley recently noted that: “for the first time in recent history, 75% of the time buyer stocks are reacting positively to M&A announcements.”

In fact, take a look at this chart provided by Barclays in their 2013 Year in review and 2014 Outlook.

US High Yield: 2014 Forecast
Barclays-US-high-yield-forecast Source: Barclays Research, Lipper FMI

The chart shows the lack of growth capital (GCP) and the increase in M&A expected by the market. A mere 19% of capital raising in the high yield space is expected to go into growth projects. The positive from this is that corporate takeovers create M&A investment opportunities for the Vertex Arbitrage Fund and the Vertex Fund. With favourable reactions to takeover announcements, we’re optimistic that this is a great time to be invested in merger arbitrage.

Additionally, if the Canadian dollar continues its recent decline Canadian resource and tech assets (noting most of their revenue is in US dollars) will look even more attractive for potential suitors. Meaning, M&A could heat up even more.

Of course, in typical Vertex style, we don’t like to leave any stone unturned. So, the other side of the coin is the Vertex Enhanced Income Fund which takes full advantage of companies paying higher dividends and paying premiums to existing bondholders to refinance debt at lower rates.


For information on this update or the funds we offer, please contact a regional VP of sales:

Noel Dattrino
(Western Canada)

James Wilson
(GTA & Western Ontario, Maritime Canada)

Michael Lindblad
(GTA & Eastern Ontario)

Janine Breck
(Nationwide Inside Sales)
866.681.5787 x122 or 604.408.5663