Merger arbitrage traders were expecting hiccups in Toronto-Dominion Bank’s proposed takeover of First Horizon Corp., but they were unprepared for what happened Thursday when the US$13.4 billion transaction melted down.

The deal spread had been widening in recent months, as some traders were anticipating a price cut. But a total collapse weeks ahead of the May 27 deadline was not in the cards. Now, these traders are desperately seeking protection in a market that’s reluctant to give it as First Horizon shares nosedive.

“It’s painful,” said Cabot Henderson, who focuses on arbitrage and special situations at JonesTrading. “The pain comes from arbs who were generally positioning for a price cut and not a full break, and are now scrambling to limit downside in an industry undergoing a rolling crisis.”

The banks scrapped the proposed takeover early Thursday after they couldn’t see a clear path regulatory approval. That slammed First Horizon shareholders, who had already endured a monthslong rollercoaster ride with the stock trading as high as $24.90 in late February before TD said the deal may be delayed by regulators. 

That was compounded by the continuous pressure on regional banks after the failure of Silicon Valley Bank in March. The stock closed at $15.05 on Wednesday, 40 per cent below TD’s $25 offer. It tumbled as much as 40 per cent Thursday to a low of $8.99.

Now, with the deal collapsed and merger-arbitrage traders forced to unwind their positions, the focus shifts to how much First Horizon is worth as a standalone company. That’s challenging considering the turmoil swirling around regional banks as PacWest Bancorp and Western Alliance Bancorp lead a renewed slide in U.S. lenders. 

Jefferies analyst Casey Haire pegged First Horizon’s fundamental value between $11 and $13 per share based on metrics with comparable firms, according to a research note. 

The Memphis-based bank looks like it’s in decent shape relative to its peers, at least in isolation, said JonesTrading’s Henderson.

“But given all the turbulence in the sector and the fact that you have to think fundamental investors are not in a buying mood right now, the price recovery could take a while,” he added.