Tortoise MLP Fund (NTG-RI) – Rights Offering – 37% Upside

Current Price – $0.40

Intrinsic Value – $0.55

Upside – 37%

Expiration Date – July 18, 2018

Rights Offering

This opportunity was suggested by Greg.

 

NTG transferable rights allow to purchase 1/3 of NTG share at 90% of the average closing price of NTG for the 5 consecutive days including and ending on July 18.

NTG is currently trading at $16.86 and will payout $0.42 dividend to the 3rd of July record holders. Excluding dividend NTG trades at $16.44. In turn the rights have intrinsic value of $0.55 ($16.44 * 10% divided by 3) and are trading at $0.4, reflecting an upside potential of 37% in 3 weeks.

 

Further Considerations

  • This Rights offering is dilutive to NAV as new shares will be issued at c. 14% discount to NAV  (taking into account issuance fees and assuming shares trade at or below NAV at the time of offering). Thus following the offering NAV will decline by 3.5%.
  • Also worth keeping in mind that significantly larger amount of funds will be required to exercise rights. For every $1,000 invested in rights, investors will need $14,000 to actually exercise those rights. This will not be necessary if market price of rights approaches intrinsic value before the expiration.

 

Main Risks

  • Drop in NTG market price from the time the rights are exercised (18th of July) till the time new shares are issued and distributed to investors. 10% decline in NTG share price during this period would completely eliminate any upside from the transaction. NTG price is mostly driven by its NAV, which has shown more than 10% volatility over the recent months. On IB there is no borrow to hedge this trade.
  • Another risk factor is the caveat that stock purchase price using rights cannot be less than 90% of NAV. NTG currently trades at 3% premium so this is currently not an issue. However, if the stock starts trading below NAV during the measurement period the full 10% rights discount will not be realized. Historically there have been periods where NTG traded slightly below NAV (Oct-17 – Jan-18).

25 COMMENTS

  1. makarid makarid

    I cannot find them in IB. Does anyone know its ticket in IB.Thanks

  2. Thinley w

    Thanks for the write-up. Is your strategy to trade the rights prior to the expiration date or to exercise the rights and sell the shares? If I understand it correctly, a 37% upside is only if you sell the rights. The upside at current prices if you exercise your rights is 11.11% ($16.44*(1/3))/($16.44*(1/3)*.9), correct?

  3. greg lia

    Yes, strategy would be to sell the rights. As far as the return if you do exercise and buy the stock, if you pay $1.20 for the right to buy a 16.44 cent stock at 14.79 your cost basis is 14.79 plus 1.2 which is 15.99. So your immediate return is 2.8%. (16.44/15.99)

    To be precise I suppose you would have to take into account how long you only had 1.2 invested and how long you had the additional 14.79 invested, do a blended average on amount invested, compared to amount gained to come up with an ROI and then annualize it if you wish.

    Stock moving to discount vs premium is the big risk, not price decline, prior to rights expiration. As DT has noted, risk after rights expire is price decline, whether thru NAV deterioration or price to NAV relationship getting worse.

  4. Martin Hernon

    Thanks for the idea. Just one thing: on your math, the upside on a right sale is 27%, not 37%, no?

    At the moment that upside is 33% btw.

  5. greg lia

    55 divided by 40 equals 1.375

    Rights are slightly less than 40 today and stock is over 17, (pre dividend) so today’s number is higher than 37 percent

  6. xuefeng

    So NTG is trading at $17.07, 90% is $15.36. Currently it’s trading at 3.7% premium so NAV is $16.46. After new share issue, the new NAV will be (3*16.46+15.36)/4=$16.185. Assume it will trade at 3% premium, the new price will be $16.67. Now you paid 0.3725*3+15.36=$16.48. Only 1% margin if counting NAV dilution.

  7. greg lia

    Your math appears to be spot on regarding the future NAV. The question is, for what reason would the market ‘wait” to price in this dilution to the market price of the stock? Consider a company any company, announcing a large secondary offering at a discount to its current trading price. In most cases the stock gets hit within seconds or minutes of its announcement, as the upcoming offering will be dilutive. The actual issuance date of the shares is of little or no relevance. That argument in the case of NTG is supported by the fact that the NAV has come down from 6 month average of 6.5 premium to now a 3.5 premium. Another way of saying this is while the official NAV is listed at 3.5 I think the market has already marked the NAV down, to the price level you suggested in your post, and is trading the stock at its 6 month average premium.
    Having lived through UTG and others however, certainly what works in theory doesn’t always work in practice. I do think if NTG maintains its premium as we get closer to expiration there will be an opportunity to exit the rights themselves profitably.

    1. FM W

      Hi Greg, NTG has just turned discount. And the rights has plunged in price. What is your opinion on this? Are you going to dump the rights or exercise the rights? Thank you.

  8. greg lia

    Stock moving to a discount was the largest risk. Rights now only buy you an 8% discount as opposed to a 10% discount so intrinsic value has dropped Into the mid 40s. The current prices could represent a good trading opportunity if discount stabilizes and as we get closer to expiration. But now trading in discount territory increases the risk.

  9. Terence

    Rights down to 21cents! NTG price dropped again today by 2%. Assuming NAV the same, the 8% discount Greg mentioned drops to 6%, and intrinsic value of rights drops to 34cents. Seems the market thinks discount will increase more.

  10. Terence

    As of yesterday’s close, intrinsic value of rights is 35 cents. But the price dropped from 30c to 19c in the last 2 hours of trading! I also expected the price to get closer to value as deadline nears, but the opposite happened.

    Company deadline is tomorrow, but I think some brokers’ deadline was yesterday. My only guess is that few right holders want to exercise the rights, and thus are forced to sell as deadline nears.

    Will be interesting how the rights continue to trade today and tomorrow.

  11. John Cooper

    So, what is the consensus? To action the rights or to sell rights at a loss.

  12. greg lia

    Rights at current price still offering an incremental 3% discount off of purchase price of stock.. 3 rights for 57 cents gets you a 1.05 discount. Suppose the decision revolves around where you think NTG will trade relative to NAV after the dust settles, and whether or not its resumes trading at the 3 to 6 percent premium it was prior to rights offering.. Currently listed at 3.7 discount but in reality trading at about a 1% premium as the NAV will be updated to reflect new shares as soon as issued. So, by my math, using the rights to acquire the stock, (at current rights pricing) allows you to buy the stock at a 2% discount.to NAV. I exited my primary position as the stock threatened to move from premium to discount, but have traded in and out since. I would expect some narrowing today as the final day, if not will like buy and execute on some shares.

  13. Joe Hill

    I took the loss yesterday. Coming up with the ~$50k to exercise my 10,000 warrants seemed more burdensome than taking a few hundred dollars of losses. Clearly up to you, but that was my thinking. I am also kind of a scared-y cat when it comes to these deadlines and wanted the warrants out of my account before today. My understanding is that they expire worthless if you do not choose to exercise by market close today (July 18)

  14. slow

    I have sold half with profit. The remaining will be converted to NTG. It seems Gundlach like it.

  15. Terence

    If I’m correct, the deadline is today at 5pm, so I thought the rights will still trade until the close today. I wonder why it does not seem to be trading? If it’s not, then right holders can only exercise, if possible.

    Like Joe Hill, I prefer not to exercise (although theoretically better) and fear the deadline. So I sold at a loss last week.

    I think this is an interesting arb and learning experience, and would classify it as one of those deals that “should have but did not work” (at least in my case in selling). Also, it did work for Slow above in selling with profit, and might work in exercising.

  16. greg lia

    NTG closed yesterday with in NAV of 16.27 and a market price of 15.76. For those who exercised, purchase price for shares should be 14.65 a $1.11 discount to yesterday‘s closing market price. This would equate to a price per right of $.37, not so bad considering only about 6.9% of the original 10% discount was actually realized.
    NTG is showing strength again in premarket today, however will have to watch closely price action between now and time shares are deposited into account.

  17. Martin Hernon

    With stock trading up currently at $16.19, it looks like I may get lucky. Ended up exercising for a lot of shares, so am taking on more risk than I would like. Is anyone hedging? Borrow at IB is expensive and very limited

  18. dt

    It’s great to see enthusiastic discussion here, however would appreciate if comments/questions focused on incremental information regarding the case rather than personal trade info. Let’s keep it more professional.

    Hope noone will get offended by this.

    Thanks for understanding.

  19. slow

    Anybody know when will the NTG shares been deposited to the account?

  20. Martin Hernon

    I think it is instructive to see how those who played in this idea dealt with the problem of decreasing market price of the rights, large cash requirement for exercise and the vanishing time to exercise. I appreciated hearing from those who sold to get rid of the risk, although at a loss. My comment was not a war story, but intended to give/get information on how to consider dealing with an NTG position.

  21. Jim Rivest

    dt, I didn’t play this deal, but I agree with Martin, I liked seeing in real time how various members dealt with the issues that popped up.

    Hope you are not offended, but I didn’t see any ‘unprofessional’ posts and my guess is a lot of us are not professionals, so more info is better than less.

  22. greg lia

    I found all of the input from members on this trade to be of value as well. I was in a similar position as Martin, although I had reduced my total rights held, I was not willing to sell outright what I had remaining at what I thought were depressed prices towards the end. So I executed as well.

    Shares seemed to hit most accounts yesterday and NAV last night was updated to reflect new shares issued. Discount to NAV 4.1 percent. Question now is will stock move back towards trading at a premium, or does it go the way of UTG where the rights offering seems to have somewhat permanently affected the premium or discount the market applies.

    Market currently seems to love CEFS with huge payouts whether those payouts have 100% coverage or not. Hopefully that will help in the case of NTG.

  23. Martin Hernon

    Good to hear that shares have hit many accounts–though not at Etrade! I’m hoping that short covering helps prices. Greg, I should’ve reduced my rights as you did, have an oversize position as a result, not willing to hedge at what are hopefully temporarily depressed prices.

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