BRW: A Low Risk Investment Using SPAC Arbitrage

Summary

  • There is virtually no downside risk when you purchase a SPAC common stock below the trust value and exit before a business combination is formed.
  • BRW is a leveraged closed-end fund run by Saba Capital that has about 82% of its portfolio invested in the SPAC arbitrage strategy.
  • The fund invests in high yield credit. But it also opportunistically invests in other products such as SPACs and closed-end funds.
  • BRW will use derivatives to enhance risk adjusted returns.
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Written by George Spritzer, co-produced by Alpha Gen Capital

BRW is a closed-end fund run by Saba Capital. It currently trades at a 9.2% discount to NAV and has 81.6% of its portfolio invested in the SPAC arbitrage strategy. It gives you a way to invest in a leveraged SPAC arbitrage strategy without having to closely monitor individual SPAC investments. But in return, you have to pay Saba Capital the expense ratio of 1.38%.

April 22, 2022 was a very rough day in the financial markets. The Dow was down 980 points, and nearly all fixed income closed-end funds were also down big. But BRW was one of the exceptions. Its NAV was unchanged at $4.69 and its market price actually rose $0.04 on that day (this was before the 1-for-2 reverse split). This shows how BRW can be quite resilient in a bear market environment.

As of June 3, on a year-to-date basis, the NAV total return is up 0.93% and the market total return is down 1.82% due to widening of the discount. But its bond market peers are generally down 5% or more, and most equity funds are down 13% or more.

Saba Capital has allocated 81.6% of BRW to the SPAC arbitrage strategy because it is one of the few ways to earn a decent return with very low interest rate or default risk. There is also a possibility of upside "optionality".

Capital Gain Opportunities/Upside Optionality

1) Many SPAC deals are consummated before the completion deadline date. When a deal closes sooner than anticipated, you receive a higher yield, because the spread below the trust value is earned in a shorter time period. You can still cash in your shares for the trust value before the shareholder vote, even when the business combination is approved by shareholders.

2) Another way you can benefit is if the SPAC announces a target that the market likes. In some cases, the common shares can trade well above the trust value. Recently, this has not happened very often, but there have been a few exceptions like DWAC and FRGE.

Portfolio Management

  • Boaz Weinstein, Founder & CIO: Founder and CIO of Saba Capital Management, a $3.4 billion RIA focused on credit relative value strategies. In 2021, risk.net named Saba Capital Management hedge fund of the year.
  • Pierre Weinstein, Partner and Portfolio Manager
  • Paul Kazarian, Portfolio Manager

Distribution Policy

BRW uses a managed distribution plan. It pays monthly distributions at a fixed rate of 12% of the previous month's average NAV divided by 12. Management says that "the plan is intended to provide shareholders with a constant, but not guaranteed, fixed minimum rate of distribution each month and is intended to narrow the discount between the market price and the NAV of the Fund’s common shares".

BRW Portfolio Sectors

BRW portfolio composition

BRW Portfolio sectors (BRW website)

BRW- Three-Year Discount History

BRW Three Year Discount History

BRW Discount History (cefconnect)

Top Ten Issuers

When we review the top ten issuers below, we see several SPAC holdings as expected, along with some closed-end funds. Three of the CEFs have high exposure to energy stocks, which has helped the fund's performance this year - (SMM), (NRGX) and (HIE). The fund holds a total of 683 different positions with many different SPAC holdings.

BRW List of Top Holdings

BRW Top Ten Issuers (BRW Website)

Recent Reverse Split Approved

The BRW board recently approved a reverse split of the common shares at a ratio of 1-for-2. The effective date for the reverse split was May 20, 2022. I see this as a positive for BRW since it has brought the common share price well above $5.

Some brokerage firms have a rule that a stock must have an average bid price above $5 a share to be eligible to be added to the list of stocks that can be bought on margin. With the new price above $8, BRW is now marginable, which should bring in additional investment that could help to narrow the discount.

Because of the reverse split, BRW just announced a large change in the monthly dividend to $0.092. The fund uses a managed distribution plan where they pay out an annual rate of 12% of the average monthly net asset value.

Saba Capital Income & Opportunities Fund

Ticker: (NYSE:BRW) NAV Ticker: XBRWX

  • Inception Date: May 12, 1998
  • Total Investment Exposure: 443 Million
  • Total Common Assets: 393 Million
  • Effective Leverage: 11.28%
  • Baseline Expense Ratio= 1.38%
  • Discount= -9.28%
  • Average 6 month discount= -6.19%
  • Annual Distribution Rate (market price) = 13.13%
  • Current Monthly distribution= $0.092
  • Annual Distribution= $1.104

Concluding Remarks

BRW is a closed-end fund and tends to trade with more daily volatility. It is quite liquid and trades with an average volume of 138,000 shares and usually has a one cent spread. Occasionally, you see unusually high volume because of a special situation. On March 31, 2021, the volume reached 1,447,700 shares because BRW was added to the PCEF exchange traded fund in their quarterly rebalancing.

I think the discount may gradually shrink for BRW over time because of the 12%+ distribution rate, and the recent reverse split should increase participation by investors with margin accounts. As a low risk fund, it is a fairly safe way to use low cost leverage to earn higher returns.

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This article was written by

George Spritzer, CFA profile picture
4.12K 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/we have a beneficial long position in the shares of BRW,HIE either through stock ownership, options, or other derivatives. 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.

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