Current Price – $8.83
Expected Tender Price - $9.38
Upside – 6% (assuming constant NAV)
Expiration Date – June 19, 2018
This idea was shared by Greg.
AEF is the surviving fund after the consolidation of 7 Aberdeen emerging market closed end funds forced by activist group City of London. This coming week it is expected Aberdeen should announce a 40%-50% percent capital return to shareholders in the form of a distribution and 99% NAV tender. Company has not indicated what portion will be distribution and which portion will be for the tender.
Expected payout is within 60 days of closing of consolidation (which happened on 27th of April).
- NAV risk - EM’s have been terrible over the past few weeks. Continued declines could offset any arbitrage gains. Difficult to accurately hedge a multi country fund especially as they are in the process of raising so much cash to distribute.
- The offer is likely to be oversubscribed and discount to NAV will most likely widen after tender expiration (for historical discount see here).
- City of London holds 28% and likely will tender all of the position.
These risks will be somewhat mitigated (i.e. discount will not be as high as historically on Aberdeen funds) by the standstill agreement reached with City of London Investment Management:
"The Fund plans to establish and announce a targeted discount policy as required by the Standstill Agreement with City of London Investment Management Company Limited (“CoL”). The policy will seek to manage the Fund’s share trading discount by: (1) committing the Fund to repurchase shares in the open market when the Fund’s shares trade at a discount of 10% or more to NAV and (2) undertaking a 15% tender offer if the average discount exceeds 11% of NAV over any rolling 12-month period commencing on April 30, 2018 and ending on December 31, 2019, provided that the Fund shall not be required to conduct more than one tender offer during such period.
Also effective April 30, 2017, the Fund’s investment adviser will waive fees and/or reimburse expenses (excluding leverage costs, interest, brokerage commissions and any non-routine expenses) to the extent necessary so that the Fund’s total expense ratio does not exceed 1.20% for two years from April 30, 2018, as provided in the Fund’s expense limitation agreement."
ABF present an opportunity to earn up to 6% to 7% percent on well over 50% of your holdings, assuming historical norms of tender participation, with some safeguards on discount minimization on remaining stake.