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Author's note: This article was released to CEF/ETF Income Laboratory members as part of our CEF Weekly Roundup analysis on October 6, 2021. Please check latest data before investing.
RIV's rights offering is live
RiverNorth Opportunities Fund's (NYSE:RIV) rights offering is now live! The fund went ex-rights on September 30, 2021 and the offering will expire on November 5, 2021. RIV's subscription price uses the same one as OPP's described above: the higher of 95% of the market price (as defined as the average closing price of the stock over the last 5 days) or 97.5% of NAV at expiry. And like OPP, this is also a transferable 1-for-3 offering.
From the press release:
September 22, 2021 | RiverNorth Opportunities Fund, Inc. Announces Rights Offering. RiverNorth Opportunities Fund, Inc. (RIV) (the "Fund") announces that its Board of Directors (the "Board") has authorized and set the terms of an offering to the Fund's stockholders of rights to purchase additional shares of common stock of the Fund. In this offering, the Fund will issue transferable subscription rights ("Rights") to its stockholders of record as of October 1, 2021 (the "Record Date" and such stockholders, "Record Date Stockholders") allowing the holder to subscribe for new shares of common stock of the Fund (the "Primary Subscription"). Record Date Stockholders will receive one Right for each share of common stock held on the Record Date. For every three Rights held, a holder of Rights may buy one new share of common stock of the Fund. The Rights are expected to be listed and tradable on the New York Stock Exchange ("NYSE") under the ticker: RIV RT. The subscription price per share of common stock will be determined based upon a formula equal to 97.5% of the reported net asset value or 95% of the market price per share of common stock, whichever is higher on the Expiration Date (as defined below). Market price per share of common stock will be determined based on the average of the last reported sales price of a share of common stock on the NYSE for the five trading days preceding (and not including) the Expiration Date. The subscription period will expire on November 5, 2021, unless extended by the Board (the "Expiration Date").
Shareholder-friendly formula reduces dilution
This subscription formula is relatively shareholder-friendly, as it will limit the extent of dilution. As I've written before, RiverNorth knows how the CEF game is played. As activist investors themselves, they can't make their subscription formula too dilutive and harmful to existing shareholders or else they'd be hypocrites when they try to push for changes at other CEFs. The trade-off for making the rights offering more investor-friendly however is that there's less incentive for existing investors to subscribe. (In contrast, a dilutive formula essentially forces existing investors to subscribe or lose out.)
Because of the similarity between the format of RIV and RiverNorth/DoubleLine Strategic Opportunity Fund, Inc. (OPP) offerings, I do expect the share price of RIV to take a similar trajectory (see our related analysis here). As the chart below shows, we can see that the price of RIV fell sharply upon the initial announcement of the rights offering but continued to drift lower in the weeks afterward. History suggests that there will be further downward price pressure on the fund until the offering period is over. This is why our standard recommendation for members is to sidestep the CEF over the entire rights offering period.
The premium of RIV dropped quickly after the offering but appears to have stabilized around par. Like OPP though, the -2.5% discount floor for the subscription price could act as a magnet to draw the fund's valuation towards it as the expiry date approaches.
Action for RIV investors
For the investor who held RIV past the ex-rights date and now owns rights, what should they do now? The first question to answer is "do you want to expand your position in RIV"? If the answer is no, then you should sell your rights on the open market. They should already be in your brokerage account under the symbol of RIV RT or similar. Remember to sell your rights before the closing date of November 5, 2021 or else they will expire worthless! I recommend doing it sooner or later because (1) you might forget, (2) for some offerings, the rights cease trading one day before expiry and (3) for some reason or another, the value of the rights generally drifts lower over the offering period.
What if you are comfortable with expanding your RIV position? Then you could consider subscribing with the rights that you have. Every 3 rights will give you the opportunity to subscribe for 1 new share of RIV at a discount. However, the amount of discount will depend on the closing price and NAV. Importantly, one should not subscribe if RIV falls below a -2.5% discount as it would be cheaper to buy the shares on the open market. At that -2.5% discount level, the rights would become worthless as well.
October 18, 2021 update
Interestingly, the rights are currently trading far below their intrinsic value. As of yesterday's (Oct. 18) closing prices, the subscription price should be around $16.58, which is a -$0.87 (or -5.00%) discount to the market price of $17.45. This would make each right to be worth $0.29 on an intrinsic basis. However, the rights last closed at only $0.02!
(Source)
This suggests that either (1) the rights are grossly underpriced and there is arbitrage potential to buy the rights and sell the shares later, or (2) that the market expects RIV's price to drift lower from now to expiry, which would make the rights less valuable as described above. Hence, because of this uncertainty, the rights are not necessarily a bargain.
We had a lively discussion regarding RIV's rights offering in the chat area of CEF/ETF Income Laboratory on the day that it was announced and continue to actively monitor the situation for our members.
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