NHS: Rights Offering Quick Notes

Summary

  • NHS's rights offering is now live.
  • The subscription formula has a floor of a -13% discount, at which point one should not subscribe.
  • Sidestepping the rights offering seems to have been the correct play once again.
  • I do much more than just articles at CEF/ETF Income Laboratory: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »
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Author's note: This article was released to CEF/ETF Income Laboratory members on April 19, 2022 as part of the Weekly CEF Roundup, with certain numbers updated.

NHS's rights offering is live

Neuberger Berman High Yield Strategies Fund (NYSE:NHS) rights offering is now live. These are the salient details of the offering:

  • Holders of Common Stock on the Record Date (April 19, 2022) will receive one transferable Right for each outstanding share of Common Stock owned on the Record Date. The Rights entitle the holders to purchase one new share of Common Stock for every 3 Rights held (1-for-3); however, any Record Date Stockholder who owns fewer than three shares of Common Stock as of the Record Date will be entitled to subscribe for one share of Common Stock. Fractional shares of Common Stock will not be issued.
  • The subscription price per share of Common Stock (the "Subscription Price") will be determined by the Fund on the expiration date of the Offer, which is currently expected to be May 17, 2022, unless extended by the Fund (the "Expiration Date"). The Subscription Price will be equal to 92.5% of the average of the last reported sales price of a share of Common Stock of the Fund on the NYSE American on the Expiration Date and each of the four (4) immediately preceding trading days (the "Formula Price"). If, however, the Formula Price is less than 87% of the Fund's net asset value ("NAV") per share of Common Stock at the close of trading on the NYSE American on the Expiration Date, the Subscription Price will be 87% of the Fund's NAV per share of Common Stock at the close of trading on the NYSE American on that day.
  • Record Date Stockholders who fully exercise all Rights issued to them can subscribe, subject to certain limitations and allotment, for any additional shares of Common Stock that were not subscribed for by other holders of Rights at the Subscription Price. Investors who are not Record Date Stockholders but who otherwise acquire Rights, including in the secondary market, are not entitled to subscribe for any additional shares of Common Stock. If sufficient shares of Common Stock are available, all Record Date Stockholders' over-subscription requests will be honored in full. If these requests exceed available shares of Common Stock, they will be allocated pro rata among those fully exercising Record Date Stockholders who over-subscribe based on the number of Rights originally issued to them by the Fund.
  • Rights are transferable and are expected to be admitted for trading on the NYSE American under the symbol "NHS RT" during the course of the Offer. The last day Rights will trade will be one business day before the Offer's Expiration Date (May 16, 2022, unless extended). During the course of the Offer, Record Date Stockholders may choose to sell their Rights.

Somewhat inexplicably, NHS's premium actually went higher after the rights offering was announced on April 7, reaching a +7.31% premium a week later (April 13).

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Data by YCharts

Given the impending rights offering, it was a no-brainer to sell NHS and sidestep the offering, while harvesting the rich premium in the process. This was the message I shared with Income Lab members in the chat area at that time:

Chat

Income Lab

It turns out that that was (again) the correct call. On the ex-rights date NHS sank as the shares became less valuable without the rights attached.

Chart

YCharts

Overall, NHS has declined by -15% since our sell call on the fund. A typical pattern that we've observed for previous rights offerings.

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Data by YCharts

I don't blame the managers for attempting the rights offering though. NHS has become quite expensive for the past year, which offers a chance for the managers to monetize the premium through offering new shares.

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CEFConnect

Subscription strategy

This is a 1-for-3 transferable rights offering. The subscription price will be the higher of 92.5% of the average closing market price on the last 5 days of the offering period, or 87% of NAV. The offering will expire on May 17, 2022.

This "higher of" condition in the subscription formula provides a floor to the subscription price, albeit a fairly low one at a -13% discount. Last week, we predicted that this floor could act as a magnet to draw the discount of the fund towards the floor as the expiry date approaches:

As we've seen previously, this floor often acts as a magnet to draw the market price of the fund towards it as the expiry date approaches. With the fund at a -2.49% discount, the floor is still some ways away, but I do expect the fund to continue to suffer price weakness over the offering period. This is why we always suggest selling funds that announce rights offerings, then buying back later.

We see that since last week, the discount has widened to its current value (as of April 28, 2022) to -5.48%. I would expect continued price weakness in the fund for the reasons mentioned above.

For those who have held past the ex-rights date and will now receive NHS rights, remember to either subscribe or to sell your rights before the expiry date. Letting them expire worthless would be the least economical outcome. The exception to this is if the fund trades below a -13% discount at expiry. In that case one should not subscribe because it would be cheaper to buy the fund on the open market. At that point, the rights would become worthless also.

For those who aren't interested in subscribing for new shares, I'd suggest selling the rights sooner rather than later. This is because if the market price of the CEF falls, the rights would become less valuable also. The rights last traded for $0.16, which is slightly below their intrinsic value of $0.25. This could suggest that the market isn't optimistic that the rights would be worth anything come expiry day (this would happen if the fund moves below at -13% discount).

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MarketWatch

Strategy statement

Our goal at the CEF/ETF Income Laboratory is to provide consistent income with enhanced total returns. We achieve this by:

  • (1) Identifying the most profitable CEF and ETF opportunities.
  • (2) Avoiding mismanaged or overpriced funds that can sink your portfolio.
  • (3) Employing our unique CEF rotation strategy to "double compound" your income.

It's the combination of these factors that has allowed our Income Generator portfolio to massively outperform our fund-of-CEFs benchmark ETF (YYY) whilst providing growing income, too (approx. 10% CAGR).

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Remember, it's really easy to put together a high-yielding CEF portfolio, but to do so profitably is another matter!

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