The Zweig Total Return Fund (ZTR) recently held a rights offering that just expired on January 7. Existing shareholders were offered the right to buy one new share for every five shares they already owned. The new shares are being sold at a 5% discount to the market value determined by averaging the closing price for the five days leading up to January 7. The subscription price was announced yesterday and it is $3.34 per share.
ZTR is a balanced closed-end fund that normally invests about 50% in high quality bonds and 50% in stocks. The fund uses a tactical allocation model that seeks to participate in rising markets and limit losses during major declines. It pays a managed distribution of 10% of NAV on an annual basis, but much of this has been return of capital recently.
These rights were non-tranferrable and were not traded on the secondary market. In a previous post, I have described how it is often not cost efficient for small investors to subscribe to rights offerings. ZTR offered an oversubscription option, where investors who exercise all of their rights can oversubscribe for additional shares (not claimed) at the discounted price.
The fund announced yesterday that subscription requests were received for 59.05 million shares, which is about double the number of shares available, but the breakdown between primary and oversubscriptions has not been announced yet. Based on the large number of shares requested, it seems likely that arbitrage players may receive less ZTR shares than expected and may be forced to cover their short positions in the open market. ZTR is currently trading at a 12% discount to NAV, but after the dilution from the rights offering, the discount will be around 10%.
The six month average discount for ZTR is only -5%, and the one year Z-score for the discount is -3.02 (or three standard deviations below the mean). I think it is quite possible that the ZTR discount will narrow considerably over the next few months.
Full Disclosure: Exercised ZTR rights and over-subscribed for additional shares.