Seeking Alpha
Recommended for you:
Profile| Send Message|
( followers)  

On Friday night BlackRock Enhanced Government Fund, Inc (NYSE:EGF) announced a repurchase or tender offer whereby shares tendered will be subject to a 2% repurchase fee. The fund is offering to repurchase up to 5% of its shares.

Cash tender offers are usually good and ethical governance actions, providing liquidity to Closed-End Fund investors at or near Net Asset Value (“NAV”)in situations where a market discount demonstrates insufficient demand for the otherwise fixed supply of a fund’s shares.

The EGF tender is interesting. Shares have traded in very close proximity with NAV for the last several months. In situations such as this, it may be appropriate that interested parties contemplate what purpose the tender offer is serving.

If a hypothetical retail investor, John Doe wanted to sell their 1000 shares on Friday, or anytime over the course of the last month they could have sold at each day’s markets close and would have always been executed at a price of at least 99% of NAV.

In contrast, an institutional investor (which should be savvy enough not to get into a large undesirable position) can not necessarily liquidate its position without the size of its orders significantly impacting market price.

I have no knowledge of EGF's governance reasons for the tender. Likewise I am not enlightened as to the intentions or thesis of Newgate Capital Management LLC, EGF’s largest shareholder whose recent 13-F filing reported holding 514,744 shares with sole investment discretion for the quarter ended September 30th. There are about 11.7 million shares of EGF outstanding.

What I have noticed is that EGF's semiannual report for the period ending date of June 30th shows (2,498,141) as “Distributions in excess of net investment income”, (7,224,748) as “Accumulated net realized loss”, and (11,362,521) as “Net unrealized appreciation/depreciation” in comparison to $196,509,701 in Net Assets. The fund previously reduced its monthly distribution from 10.5 cents per share to 8 cents per share on its March 31st payment and CEFConnect has been classifying a portion of its smaller distribution as Return of Capital (“ROC”) since April.

Distribution changes are always possible in any Closed End Fund, as are changes to a fund's market prices. Ongoing tender offers should never be assumed. Even when there is an ongoing plan in place, it can be in the interests of the Board's governance to change that plan.

Possible future changes to the distribution may or may not be relevant. The asset class may or may not do well. I neither own EGF, nor am I short. I am not offering investment advice. At present, the current market price of $16.55 is greater than 98% of the $16.67 Net Asset Value. Today, ignoring the possibility of excessive transactional costs, a simple sell order would appear to provide more a higher relative valuation upon exit than tendering. Of course, this could conceivably change.

Disclosure: No positions

Source: BlackRock Enhanced Government Fund: Observations of a CEF and Its Tender