Author's note: This article was released to members of CEF/ETF Income Laboratory as part of the CEF Weekly Roundups on May 15, 2023, with certain numbers updated. Please check the latest data before investing.
Closed-end fund ("CEF") Neuberger Berman High Yield Strategies Fund (NYSE:NHS) just announced a rights offering. This will be a 1-for-3 transferable rights offering. The ex-rights date will be May 22, 2023, while the expiry date of the offering is June 20, 2023. The rights will trade under the symbol "NHS RT" during the course of the offer, and will be tradeable until one day before the expiration date. The subscription price of the offering will be the highest of 92.5% of the average closing share price of the fund on the five days until expiry, or 89% of NAV.
From the press release (excepts):
Neuberger Berman High Yield Strategies Fund Inc. (NYSE American: NHS) (the "Fund") announced today approval of the terms of the issuance of transferable rights ("Rights") to the holders of the Fund's common stock (par value $0.0001 per share) ("Common Stock"), as of the record date, May 23, 2023 (the "Record Date"). Holders of these Rights will be entitled to subscribe for additional shares of Common Stock (the "Offer") at a discount to market price.
- Holders of Common Stock on the Record Date ("Record Date Stockholders") will receive one 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 three Rights held (1-for-3).
- 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 June 21, 2023, 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 89% 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 89% 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.
- 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 (June 20, 2023, unless extended).
NHS had been trading in an excessively high valuation for quite a few weeks now (relative to its peer group), peaking at a +7.04% premium on April 19, 2023. This high valuation is probably what triggered the CEF managers to pull the trigger on a rights offering, as it can be accretive to the fund when a rights offering is conducted at a premium, vs. being dilutive when its conducted at a discount. A similar spike premium was probably also the trigger for last year's rights offering, which was covered in a previous CEF Weekly Roundup (public link). For more information on what it means for a CEF rights offering to be accretive or dilutive, see: Introductory: What Is NAV Dilution In CEF Rights Offerings?
Unfortunately, what usually happens is that after the rights offering is announced, the premium/discount of the fund collapses so what might have been an accretive offering at the time that the rights offering was announced, because a dilutive offering anyway.
We can see this happen already after the announcement of the rights offering last week, with the valuation quickly dropping from a premium of +5.42% to a discount of -1.44% in only four days.
How low will NHS go? The subscription price of the offering will be the highest of 92.5% of the average closing share price of the fund on the five days until expiry, or 89% of NAV. The "higher of" condition places a discount floor of -11% to the subscription price, preventing a vicious cycle where a wider discount implies more dilution, which causes the discount to widen further. That said, the -11% discount floor is still some ways away from the current discount of -1.44%, so I think that there is still some downside for the fund.
Plan of action
Hence, our suggestion for those who hold NHS, as usual, is to sell now or before the ex-rights date of May 22, 2023, and then rebuy the fund after the offering is over. History has shown that the "sell and rebuy" strategy to gain free shares of the CEF usually gives a better result than holding through the rights offering and subscribing for slightly discounted shares.
To reduce market risk, one could switch the money to other high-yield CEFs such as First Trust High Yield Opportunities 2027 Term Fund (FTHY) (-11.95% discount, a Tactical Income-100 portfolio holding) or New America High Income Fund Inc. (HYB) (-14.81% discount, an Income Generator portfolio holding) in the meantime.
I predict the overall Neuberger Berman High Yield Strategies offering to be similarly dilutive to the NAV/fund of the shares, due to the combination of new shares being issued at a discount and a likely sales load that will be charged on the new shares as well as other offering costs. This year's prospectus for the rights offering hasn't been released yet, but last year's offering charged a sales load of 3.75% and offering expenses of 1.25% which will be borne by all shareholders.
For those who are holding through the offering, either subscribe or sell the rights on the open market. However, do not subscribe if the discount drops below -11% because it would be cheaper to buy the Neuberger Berman High Yield Strategies fund on the open market.
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