How To Profit From The Liquidation Of Eagle Growth & Income Opportunities Fund

Summary

  • EGIF has announced that the fund will be liquidating.
  • The Fund has sold all of its portfolio holdings and its assets have been invested in a U.S. Treasury money market fund.
  • A previous advisor to the Fund has threatened litigation against EGIF and its board.
  • A portion of the fund will be kept in a liquidation trust until the litigation is resolved.
  • EGIF is currently trading at an 8% discount to its NAV.
  • Looking for more stock ideas like this one? Get them exclusively at Yield Hunting: Alt Inc Opps. Get started today »

Reason To Invest in a Liquidating Fund

Why would anyone ever want to invest in a fund going out of business? The answer is simple. If the current market price of the fund is much less than the present value of what will be paid to shareholders in liquidating payments, a profit can be made by buying shares that are entitled to those liquidation payments.

Eagle Growth & Income Opportunities Fund (NYSE:EGIF) was a hybrid balanced closed-end fund seeking total return. The fund was created in June 2015, and originally had a 12-year term, so the original termination date was May 2027. I wrote a Seeking Alpha article on the fund back in 2017, if anyone is interested in reading more about the fund's prior history.

Quite a bit has happened with this fund over the last two years. The previous manager of the fund was Four Wood Capital Advisors (or FWCA) started by Steve Baffico. Baffico was a former BlackRock managing director, and left Guggenheim Funds to start the firm in 2011.

Over a number of years, The Independent Trustees of EGIF have been proactive and have taken some steps to address the EGIF's high fees and lagging performance:

  • Negotiated a 20 basis point reduction in the management advisory fee charged by FWCA.
  • Negotiated a 50% reduction in the investor support services fee that FWCA's parent firm charged the fund.

Several key personnel of Four Wood departed in 2017-2018. The Board felt that this adversely impacted the quality of services provided to the Fund.

In November 2018, without consulting the Independent Trustees, Four Wood obtained a proposal to merge EGIF with an unaffiliated closed-end fund. The merger would result in FWCA receiving significant compensation if the merger was consummated. FWCA advocated that the Board approve the Merger Proposal.

The Independent Trustees did a detailed analysis of the Merger Proposal and considered the differences between the Fund and the acquiring fund. They decided not to approve the merger because:

  • The acquiring fund did not have a limited term. EGIF originally had a termination date in 2027. So the merger would have deprived shareholders of the right to receive their portion of the Fund's net asset value in 2027, eliminating any discount to NAV existing at that time.
  • The acquiring fund and EGIF had different investment strategies and exposures.

The EGIF advisory agreement with FWCA was up for renewal in May 2019. The Independent Trustees chose to extend the agreement for only a three-month period, in order to provide time for further consideration of the options available.

In July 2019, the Board received a joint proposal from First Eagle Alternative Credit and Eagle Asset Management, Inc., the Fund’s existing sub-adviser. The Independent Trustees noted that the Advisory Proposal maintained the Fund’s independent existence and its limited term feature and enhanced the Fund’s existing investment strategies.

They also noted that the Advisory Proposal was projected, because of expense limitations offered by the Adviser and Eagle, to lower the Fund’s total expense ratio by up to 12 basis points. The Independent Trustees then negotiated with the Adviser and Eagle a further reduction of five basis points in the expense cap.

Following additional discussions the Board appointed the Adviser and Eagle as the Fund’s investment adviser and sub-adviser, respectively, effective August 31, 2019. The Fund’s advisory agreement with FWCA expired August 30, 2019, pursuant to its terms.

Four Wood (the old advisor) has threatened litigation against EGIF, the Independent Trustees and First Eagle. FWCA claims the Fund, the Independent Trustees and First Eagle are liable to FWCA based on a variety of legal theories arising from the claimed failure of the Board, on behalf of the Fund, to approve the Merger Proposal, from the expiration of the Fund's advisory agreement with FWCA and from the selection of First Eagle to replace FWCA. FWCP (the parent of FWCA) also has threatened to bring derivative claims on behalf of the Fund against the Independent Trustees and First Eagle on similar legal theories. The parties deny all of the claims threatened against them.

I am not an attorney, but as a layman it appears to me that Four Wood's threatened litigation is frivolous. I would appreciate hearing opinions from any attorneys who read this article in the comment section. As a regular reader of other Seeking Alpha articles, I know that the comment section can sometimes be more valuable than the article itself.

On May 27, 2020, EGIF announced that it intended to dissolve, liquidate and distribute its net assets to shareholders. The Fund's shareholders were asked to vote on proposals to approve non-interim arrangements with FEAC and EAM. Additionally, shareholders were asked to vote on the change in the Fund's termination date from May 14, 2027 to May 14, 2024.

Although a majority of the Fund's shareholders who voted their shares in connection with these proposals voted in favor of each of these proposals, the Fund was unable to obtain the statutory quorum required to approve any of the proposals. After significant consideration, it was determined that a merger is not feasible and that liquidation is in the best interests of the Fund and its shareholders.

Liquidating Distributions with a Reserve Fund

In accordance with the liquidation plan, the Board will determine a Reserve Fund to provide for Contingent Liabilities and trust expenses. The amount of the Reserve is expected to be based upon the amount of damages that Four Wood has alleged regardless of the merits of the potential claims. The amount related to the threatened litigation comprises the largest single component of the Reserve Fund.

As previously announced, it is anticipated that the Fund's liquidating distributions will be comprised of one or more cash distributions plus a 1:1 per share interest in the Liquidating Trust. The liquidating distributions together will represent substantially all of the Fund's net assets at the time of liquidation.

Once the amount of the Reserve has been determined, the Fund will issue another press release announcing the amount of the Reserve and the effective closing date for determining the shareholders entitled to receive liquidating distributions from the Fund.

The Fund’s shares will continue trading on the New York Stock Exchange through the Closing Date and will be suspended from trading before the open of trading on the business day following the Closing Date. There will be no secondary market for the Fund's shares after this date. It is currently anticipated that the Fund could commence paying liquidating distributions beginning approximately one week after the Closing Date.

The fund is currently trading at a -7.70% discount to NAV or about a dollar below the NAV. Until the Fund issues another press release with further details, we can only roughly estimate how much will be distributed in the short term and how much will remain in the liquidation trust.

I am using a rough estimate of 5% to 10% that will remain in the liquidation trust. I am hopeful that if I buy EGIF at the current price of $12.70 or lower, I will receive my entire investment back within a few weeks. Another dollar or so will be tied up in the liquidation trust which may take a year or longer to pay out. The IRR on the total investment is not bad, since most if not all of your investment should be returned within a few weeks.

It is also worth pointing out that there is additional accounting involved in holding the liquidation trust, since you will receive a K-1 and not a 1099. Shareholders will not have the right to sell or transfer the Trust unless the shareholder dies. The interests in the Liquidating Trust will not be offered to the public and will not be traded.

I believe that some of the recent selling of EGIF which has widened the discount from 3% to 8% has come from individuals or institutions that cannot legally own a liquidation trust, or do not want the possible hassle of owning one.

EGIF looks reasonable here as a way to park some excess cash for a fairly short time period, as long as you are willing to eventually own the liquidation trust which will not be traded and may take a year or longer to pay out completely. Once the liquidation trust is formed, it will show up in your portfolio as a CUSIP. It may or may not be assigned a value. Some brokers assign a value of zero to a liquidating trust, even though this is not a true estimate of the remaining value. You should expect to receive a K-1 from the liquidation trust until it pays out all of its distributions.

I have not tried to compute an IRR for this investment, since the numbers can vary wildly with small differences in how long the initial payment will take. But it is clear that in the most likely scenarios, most of your initial investment would only be tied up for a very brief period, so the IRR on the remainder would be very high.

Marketplace Service For Those Hunting For Yield

George Spritzer's top investment ideas are being featured on Alpha Gen Capital's "Yield Hunting" marketplace service.

This service is dedicated to yield/income investors who wish to avoid market froth. We encourage investors to benefit from yield opportunities within closed-end funds, business development companies, and other niche areas. For safe and reliable income streams, check out Yield Hunting.

This article was written by

George Spritzer, CFA profile picture
4.07K Followers
Targeting 8+% Income Stream using CEFs, ETFs, Munis, Preferreds and REITs

George Spritzer, CFA is a registered investment advisor at Southland Investments and specializes in managing closed-end funds for individuals. George uses the following investment strategies:1) Opportunistic Closed-end fund investing: Buy CEFs at larger than normal discounts to NAV and sell them when the discounts narrow. 2) Exploit special situations: tender offers, fund terminations, fund activism, rights offerings etc. Some of my premium articles are published on Alpha Gen Capital's "Yield Hunting: Alt Inc Opps" https://seekingalpha.com/author/alpha-gen-capital/research

Disclosure: I am/we are long EGIF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Recommended For You

Comments (56)

To ensure this doesn’t happen in the future, please enable Javascript and cookies in your browser.
Is this happening to you frequently? Please report it on our feedback forum.
If you have an ad-blocker enabled you may be blocked from proceeding. Please disable your ad-blocker and refresh.