CEF Weekly Review: Western Asset Is Doing A Nuveen

Welcome to another installment of our CEF Market Weekly Review, where we discuss closed-end fund (“CEF”) market activity from both the bottom-up – highlighting individual fund news and events – as well as the top-down – providing an overview of the broader market. We also try to provide some historical context as well as the relevant themes that look to be driving markets or that investors ought to be mindful of.

This update covers the period through the last week of June. Be sure to check out our other weekly updates covering the business development company (“BDC”) as well as the preferreds/baby bond markets for perspectives across the broader income space.

Market Action

CEFs were mostly up on the week with MLP and Hybrid sectors leading the way. Over the month, most sector NAVs were higher and only one sector saw discount widening. All but 3 sectors had positive total price returns on the month with Utilities underperforming.

June was the 7th up month over the last 8 for CEFs.

CEFs have nearly made up for their post-2022 drawdown.

The average CEF sector discount is only slightly wider of its historic average. Fixed-income discounts are tighter than their average and equity CEF discounts are wider.

Market Themes

The Western Asset Global Corporate Defined Opportunity Fund (GDO) is doing a Nuveen. Specifically, it’s holding a tender offer for all of the fund’s shares at the NAV. If there is $50m or more of net assets remaining after the tender offer (latest figure is $188m) then the fund will carry on as a perpetual CEF with a new name. If there would be less than $50m of net assets after the tender offer then the tender offer will be canceled and the fund will terminate.

Recall that Western Asset has done something different with its CEFs previously. For example, with its Mortgage Opportunity Fund (DMO) the company simply asked its shareholders to turn the fund into a perpetual one and they obliged. Granted, DMO traded at a premium to NAV when this happened so, arguably, the fund’s termination would have eliminated the premium. In practice, however, the premium soon disappeared anyway.

This tender offer / termination approach comes straight out of Nuveen which has followed it with quite a few of its term CEFs. The company has been very consistent with offering investors an exit at the NAV which has been good to see. Recall that this approach is actually preferrable to a straight-up termination because it often results in the fund continuing to exist as a perpetual CEF. It also puts less pressure on the NAV than a termination would since fewer assets need to be sold down, resulting in less trading slippage. Hopefully, other managers start using this playbook for their term CEFs as well.

Investors who want to keep holding the fund would want to tender their shares if there is a discount and then buy them back if it remains alive, in which case it would move to a high single-digit discount most likely. Investors who don’t particularly want to keep the fund can either tender if there is a discount or sell if it somehow moves to a premium.

Market Commentary

Apollo loan CEFs AIF and AFT said their shareholders approved the merger with the BDC MFIC. It was not exactly overwhelming as they only got about 53% of the vote. Generally speaking, fund boards tend to get their way as shareholders often vote against their own interests as is the case here. Higher information investors most likely sold out when the funds traded out to premium valuations leaving lower information investors to vote yes. The funds then promptly sold off as their discounts aligned with that of MFIC.

The ClearBridge MLP CEFs (CTR, EMO, CEM) have completed their pre-merger tender offers. These offered generous terms to buy 50% of outstanding shares at 100% of NAV. Roughly 90% of the submitted shares were bought back. This highlights a couple of things. One, a lot of people don’t submit their shares for the tender offer and two, the consequence is that investors who submit all their shares can really benefit. The discounts of the funds went from about 4% prior to the tender offer expiry to about 8-10% which was the base case scenario we discussed earlier. Because the terms were so generous even buying before the tender offer worked out well. Not submitting shares doesn’t make sense economically because it’s always possible to buy some back afterwards.

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