GLU: Rights Offering Quick Notes

Summary

  • GLU's rights offering is now live.
  • Rights are discounted versus their intrinsic value, possibly arbitrage opportunity.
  • Do not subscribe if GLU drops below $16 at expiry.
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Author's note: This analysis was released to CEF/ETF Income Laboratory members as part of the CEF Weekly Roundup on May 23, 2022, with certain numbers updated.

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Gabelli

The Gabelli Global Utility & Income Trust (NYSE:GLU) have come out with a rights offering.

These are the salient terms of the offering:

  • Each shareholder will receive one transferable right (the “Right”) for each common share held on the record date (May 12, 2022).
  • Four Rights plus $16.00 (the “Subscription Price”) will be required to purchase one additional common share (the “Primary Subscription”). The purchase price will be payable in cash.
  • Record date shareholders who fully exercise their Primary Subscription Rights will be eligible for an over-subscription privilege. This privilege entitles these shareholders to subscribe, subject to certain limitations and a pro-rata allotment, for any additional common shares not purchased pursuant to the Primary Subscription. Rights acquired in the secondary market may not participate in the over-subscription privilege.
  • The Rights are expected to trade “when issued” on the NYSE American beginning on May 10, 2022. The Fund’s common shares are expected to trade “Ex-Rights” on the NYSE American beginning on May 11, 2022. The Rights are expected to begin trading for normal settlement on the NYSE American (NYSE American: GLU RT) on or about May 17, 2022.
  • The Offering expires at 5:00 PM Eastern Time on June 23, 2022, unless extended.

Subscription strategy

This is a transferable 1-for-4 offering with an ex-rights date of May 11, 2022 and an expiry date of June 23, 2022. Like other Gabelli rights offerings, but unlike most other CEF rights offerings, GLU's subscription price is fixed, at $16.00.

The fund's price has underperformed its NAV by around -5% since the offering was announced, which again supports our recommended "sell and rebuy" strategy for funds that announce rights offerings.

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Data by YCharts

GLU closed on June 3, 2022 at a share price of $17.10 and a NAV of $19.01, giving a discount of -10.05%. The share price is $1.10 higher than the fixed subscription price of $16, meaning that if one were to subscribe today, you'd only be getting new GLU shares at a -6.4% discount to the current market price of the fund.

Because of the fixed subscription formula, the value of the rights are strongly sensitive to how far above (or below) GLU is trading relative to the fixed subscription price of $16. It is important to note that if GLU declines below $16 by expiration date, one should not subscribe as it would be cheaper to purchase the fund on the open market. At that point, the rights would also become worthless.

When the rights first traded trading last week, GLU's share price was only around $0.50 higher than $16. This meant that the rights only had an intrinsic value of around $0.125. Yet, the price of the rights traded much lower than that (at around $0.03), meaning that the rights were trading far below their intrinsic value. As previously explained for other similar offerings, this is likely because of the risk that the rights would become worthless should the share price decline below $16.

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MarketWatch

Now, the converse is also true; should GLU's share price appreciate, the rights would become more valuable. We saw this happening last week; with GLU's price appreciating to over $17, the rights rose strongly in value as well.

At current pricing, the rights have an intrinsic value of around $0.275. This means that the rights are still significantly underpriced at their last close of $0.15. This ought to suggest that if one is bullish on the markets and on GLU specifically, then buying the rights here could be a potentially profitable strategy should GLU continue to rise. Importantly, we should expect the rights to rise towards their intrinsic value as the expiry date approaches, as long as GLU is trading comfortably above $16 by then.

The fact that the rights are still trading far below their intrinsic value suggests the upside and downside probabilities are asymmetric. Meaning, the market thinks that there's a greater chance of the rights becoming worthless than them exploding higher in value. This is expected because CEFs tend to exhibit negative price pressure over the rights offering period. In the case of GLU's offering which has a fixed subscription formula, we also have the risk of overall market movements to contend with as well.

The offering expires June 23, 2022. Should GLU be trading comfortably above $16 in the final days before expiry, we could take another look to see whether the rights are still discounted in order to potentially execute an arbitrage play.

About GLU

GLU is a global equities fund focusing on the utilities space. Its top holdings include National Fuel Gas Company (NFG), Swedish Match (OTCPK:SWMAF) (OTCPK:SWMAY), AES Corp. (AES) and NextEra Energy Partners (NEP).

Table

Gabelli

GLU last closed at a discount of -10.05% and a market distribution yield of 7.02%, paid monthly. It uses 38% leverage and charges a baseline expense ratio of 1.39%.

Strategy statement

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