Aberdeen Emerging Markets (AEF) – Expected Tender Offer – 6% upside

Current Price – $8.83

Expected Tender Price – $9.38

Upside – 6% (assuming constant NAV)

Expiration Date – June 19, 2018

SEC Filling

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).

 

Risks

  • 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.”


Conclusion

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.

9 COMMENTS

  1. work 22

    Is the fund NAV going to drop from the tax implications of all the capital gains they incurred consolidating and selling assets?

  2. greg lia

    Tender should be slightly accretive to NAV, and NAV will be adjusted downward on ex distribution date

  3. dt

    This one might be worth watching closer to tender expiration date (June 19th). Tender will take place at 99% of NAV, which at current prices represents 6% upside.

    Tender will be for 32% of outstanding shares, which should cap the proration somewhat. Both City of London Group and Bulldog Investors are expected to tender, so it will definitely be oversubscribed.

    There will also be capital gains distribution on the 4th of June.

    Full tender details:
    https://www.sec.gov/Archives/edgar/data/846676/000110465918034909/a18-13197_1ex99da1i.htm

  4. Terence

    Expires June 19 – anyone playing this? As DT said, let’s reassess now. Discount still about 6%. No odd lot. Tender for 32%, and also dividend (ex tomorrow) of about 10%. Let’s assume we get half back at 99%, and sell half after tender at 92% (around 8% discount in the past year – see below), thus yielding 95.5%, or a gain of 1.5%. Worth the risk?

    https://www.cefconnect.com/fund/AEF

  5. greg lia

    I still have some of my position. I would love to see 50% or more shares accepted in the tender. Would get me to a respectable position despite the blood bath that is occurred the past month or two in emerging markets. I would not rely too heavily on past history on the discount however. AEF has only been in existence for a month or two. It is the entity that remains after the collapsing up seven Aberdeen closed-end funds into one and then a conversion into a new entity, AEF. City of London has negotiated some triggers for another tender offer if discounts get too wide. But like most tenders could get nasty in the immediate aftermath of the tender.

  6. Terence

    Per news below. I compute 46% of shares tendered will receive the 99% of nav. Low but not surprising.

    Based on current information, approximately 61,362,593 shares of common stock or 68.97% of the Fund’s outstanding stock were tendered through the expiration date. This total includes shares tendered pursuant to notices of guaranteed delivery. This number is subject to adjustment and should not be regarded as final. Because the number of shares tendered exceeded 28,470,130, the number of shares that will be purchased by the Fund will be pro-rated based on the number of shares properly tendered by each shareholder. No more than a total of 28,470,130 properly tendered shares will be accepted for payment at a price per share equal to 99% of the Fund’s net asset value per share (“NAV”) as of the close of regular trading on the NYSE American on June 20, 2018.

  7. dt

    With post tender price discount to NAV at 12% (vs. 6% before expiration) and slightly less than half of the shares accepted in the tender, this opportunity ended at c. breakeven.

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