Written by Nick Ackerman, co-produced by Stanford Chemist
Special Opportunities Fund Inc (NYSE:NYSE:SPE) remains one interesting investment. We hold this position in our Tactical Income- 100 portfolio at the CEF/ETF Income Laboratory. The TI portfolio is designed to take advantage of funds that are in a more special situation that can deliver alpha. SPE fits this description well with its unique approach to investments. Its portfolio includes other closed-end funds; business development companies and traditional CEFs. It also holds a sleeve of SPACs, some common stock, preferred.
It also includes convertible notes, warrants, senior secured notes, corporate notes, rights and liquidating trusts. Though in smaller, almost immaterial allocations to these latter investment types.
Being a portfolio position, we cover the fund quite regularly. For more on the fund itself, you can refer to the previous analysis of the fund. Of which, we will be putting together more in the future as warranted. For today, we are going to be looking more at the announcements that just came across the wire as it is a lot to digest.
First, in the press release, we had the announcement of the quarterly dividend for the preferred. The preferred that is soon not to exist. So this represents the last quarterly dividend that will be paid.
Special Opportunities Fund, Inc. (NYSE: SPE) (the “Fund”) today announced that the Fund’s Board of Directors (the “Board”) has declared a quarterly cash dividend of $0.21875 per share on the Fund’s 3.50% Convertible Preferred Stock, Series B (the “Convertible Preferred”). The dividend is payable on June 30, 2021 to holders of record as of June 21, 2021.
The ticker symbol for the issue is (NYSE:SPE.PB).
(Source - Seeking Alpha)
The reason this will be the last one is that this is the last quarter before they will be redeeming the outstanding preferred.
The Fund also announced that the Board has determined, in accordance with the “Optional Redemption” provision of the prospectus for the Convertible Preferred, to redeem all shares of the Convertible Preferred that are still outstanding at 5 pm EST on July 9, 2021 at $25 per share.
You might be interested to note that the price of the preferred is over $30 in that snippet above. We would typically see a collapse in the price of the preferred. However, this is a convertible preferred and therefore, investors can become common stockholders in SPE. At the current time, it is quite an attractive proposition as well Though one should convert before the deadline of July 9th, 2021.
Holders of the Convertible Preferred may, until 5 pm EST on July 9, 2021, convert their preferred shares into shares of Common Stock at a ratio of (1) 1.9416 shares of common stock for each share of the Convertible Preferred until June 21, 2021 and (2) 1.9558 from June 22, 2021 until July 9, 2021 (in both instances, Holders will receive cash in lieu of any fractional shares of common stock). Holders of shares of the Convertible Preferred that do not elect to convert their shares into common stock by 5 pm EST on July 9, 2021 will receive the redemption price of $25 in cash per share and no dividends on the Convertible Preferred shall accumulate after July 9, 2021. The redemption will be automatic and requires no action on the part of the stockholder. As of the date of this release, the market price of the Convertible Preferred is approximately $30 per share which is significantly higher than $25 per share. Therefore, holders of the Convertible Preferred are advised to check the market price of both the common stock and the Convertible Preferred before determining whether and when to convert their shares into common stock.
At the time of typing this, SPE is trading at $15.48 per share. Therefore, the equivalent of $30.06 per share is converted before June 21st, 2021. After June 22nd, 2021, the equivalent would be $30.28 per share, reflecting the dividend being paid.
As you can see, if one does not elect to convert, they will be redeemed out at $25 cash, which is a much worse deal. Therefore, we should, in theory, see a considerable amount of dilution for SPE happen soon.
We knew this redemption/conversion date was happening and that is why we were keeping an eye on the discount at this time. While SPE's discount of 17.20% (based on the share price as of 6/15/2021 and NAV on 6/11/2021) seems really attractive compared to the 1-year average of 13.45%, the NAV will be taking a hit. Luckily for us, we don't have to calculate it ourselves. The fund provides us a diluted NAV as of 6/11/2021 if every single preferred converted.
(Source - Fund Website)
While the dilution will take a significant hit on SPE's NAV, investors should note they are going to change their managed distribution plan from 7% to 8%. Previously, it was based on the NAV of the fund on the last trading day of the year.
They will be still using the 12/31/2020 NAV amount of $16.08 that they had previously. Even though the new rate will be set to take effect in July. The new rate would be an annualized $1.2864 or $0.1072 per month. Not a terrible increase from the $0.0940 they were paying.
The Fund also announced that the Board has approved an increase in the monthly distributions to common stockholders provided under the Fund’s managed distribution plan (the “Plan”). Beginning in July 2021, the Fund intends to make monthly distributions at an annual rate of at least 8% (or 0.6667% per month), based on the net asset value [NAV] of the Fund’s common shares as of the last business day of 2020, an increase of 1% from the previous rate of 7% per annum. Under the Plan, to the extent that sufficient investment income is not available on a monthly basis, the Fund will distribute long-term capital gains and/or return of capital. To the extent that the Fund’s net investment income and net realized capital gains exceed the aggregate amount distributed pursuant to the managed distribution plan, the Fund may make an additional year-end distribution. No conclusions should be drawn about the Fund’s investment performance from the amount of the distributions.
Since the fund had been doing so well this year, it wouldn't have been a bad thing to use a different date. It could have resulted in an even higher distribution boost as evidenced by the NAV amounts posted above. Even if they used the fully diluted figure. Still, can't complain about a boost at all!
Finally, the rights offering. Most members will know that we typically avoid all rights offerings. However, in this case, it isn't a common stock rights offering. Instead, they are going to use a rights offering to raise a new convertible preferred issue. This is exactly what they had done with their previous preferred issue raises. So for me, it wouldn't seem necessary to go out and sell the shares to revisit later, which we typically do when a rights offering is for common shares. There will be dilution to the NAV - just as we are seeing now with the last convertible preferred - however, it isn't as disruptive until the redemption/final convert date.
Lastly, the Fund announced that the Board has approved filing with the SEC a registration statement for a rights offering to common stockholders entitling the holders of such rights to purchase shares of a newly issued class of convertible preferred stock. Although the terms of the rights offering have not yet been established by the Board, a portion of the funds raised may be used to conduct a self-tender offer for common stock.
As they mention, the terms aren't final yet. Though they hint that the funds raised may be used to conduct a self-tender offer. This seems like it would be an interesting route because it would essentially be buying back some of the shares that they are about to create with these converted preferreds. Though it could help offset some of the dilution that is about to happen.
Personally, if it is a 3.5% coupon rate as it was with SPE.PB, I wouldn't necessarily be the most interested. SPE.PB launched in 2016 when rates were starting to begin to rise too. Due to the convertible nature of the offering and the now present interest rate environment, there is a chance they could offer an even lower rate than 3.5%.
(Source - FRED)
The latest press release had a lot of moving parts from SPE. The fund is a unique and interesting holding. One I don't plan on selling any time soon. Though I intend to revisit this fund later on in July to see where the NAV will finally shake out - seeing how many investors converted to common shares. If full dilution takes place, that would mean that based on today's price and diluted NAV, the fund has a ~9.2% discount, which is considerably tighter than the 17.20% of today.
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This article was written by
I provide my work regularly to CEF/ETF Income Laboratory with articles that have an exclusivity period, this is noted in such articles. CEF/ETF Income Laboratory is a Marketplace Service provided by Stanford Chemist, right here on Seeking Alpha.
Disclosure: I am/we are long SPE. 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.
Additional disclosure: This article was originally posted to the CEF/ETF Income Laboratory on June 3rd, 2021.