EV Municipal Bond Fund (EIM) – Tender Offer – 6% Upside

Current price: $12.27

Tender Price: $13.13

Upside: 6%

Expiration Date: 17th of May, 2019

Tender Announcement

This idea was shared by Patrick.

 

This is a classic case of closed end fund trading at a discount to NAV and launching tender offer at 98% of NAV. However, in this case fund manager bowed to activist pressure and agreed to launch not one but three tenders if the discount persists.

EV Municipal Bond Fund trades at 8.5% discount to NAV and agreed to buy back 10% +5% +5% of the outstanding shares. These tenders are result of standstill agreement with Karpus Investment Management, which owns 12.5% of the stock. The first one is for 10% and the other two will be conditioned on the subsequent discount:

The Board also authorized the Fund to conduct two conditional cash tender offers to follow the Firm Tender Offer, provided certain conditions are met. Specifically, as soon as reasonably practicable after the Firm Tender Offer closes, the Fund will announce via press release the commencement of a 120-day period. If, during such period, the Fund’s common shares trade at an average discount to NAV of more than 6% (“First Trigger Event”), the Fund will conduct an additional tender offer (the “Initial Conditional Tender Offer”) beginning within 30 days of the end of the month in which the First Trigger Event occurs. The Initial Conditional Tender Offer will be for up to 5% of the Fund’s then-outstanding common shares at 98% of NAV per share as of the close of regular trading on the NYSE on the date the tender offer expires.

Karpus Investment will most certainly tender full position and all three offers are likely to be oversubscribed. Nevertheless, due to large total tender size (20%) I expect the discount to narrow further. Thus even if part of the position is not accepted in the tender (especially the first one), I should be able to liquidate it around current prices.

NAV volatility risk is relatively low as EIM invests in A+ rated municipal bonds - fund's NAV has remained within range of $12.71 - $13.43 over the last year. However, rise in interest rates would negatively effect prices of the underlying bonds and NAV as majority of portfolio has 10+ years maturity. For the initial tender this risk is minimal due to short time frame, but the other two would be extended over the period of at least 8 months and the risk of NAV volatility is obviously higher.

12 COMMENTS

  1. fishwithwings

    Do I understand it correctly: the next tender offer will be around 120 + days from the first tender offer and the final one will be 120 days from the second tender offer?

    1. dt

      Yes, probably slightly longer than that as there will probably be a gap between tender end and commencement of 120 period.

  2. rmg141

    Any specific insight into (or past experience with) how a tender like this is treated for tax purposes?

    The phrase in the Tax Consequences section of tender offer documentation seems to indicate that as long as there is a substantial reduction in ownership stake, it will not be treated like a dividend. But, if there’s any possibility of a tender being treated like a dividend for tax purposes this seems like a decent sized risk. What I’m getting at is if you have a 6% gain and it’s treated like a short-term capital gain, you make ~4% net but if you have a 6% gain and the entire tender price is treated like a dividend, that could be a 15%+ loser net (on the portion that was “successfully” tendered).

    http://archive.fast-edgar.com//20190418/AB2S8222Z222QTZ2222J2Z3CPNSNZC22B2B2/

  3. yak

    I’m new to all of this, so I’d love confirmation from the pros here, but your figure can’t be right. If the whole amount is a dividend, then you also have a capital loss of 100% of your initial investment, which will offset your gain, leaving you back at your 4% figure, however you got there

    1. over2u

      On this, dividends and capital gain may be treated as separate baskets for tax purposes (at least in some jurisdictions)

    2. rmg141

      I totally get what you’re saying, and that certainly seems logical.

      But I know enough to know the tax code is kind of crazy and wouldn’t want to size too aggressively without confirmation. I’ve reached out to my tax advisor and will reply if I find out anything credible. In the mean time, if anyone else has experience please feel free to chime in.

  4. Lagrandebelleza

    Anyone else holding? Although this might get oversubscribed I think it will help narrow the gap between price and NAV so interesting to be a holder at this point a relatively small allocation.

  5. Terence

    For those who played this tender, it seems the gain is due to the NAV rising, rather than the arb play itself. The NAV has been steadily rising from mid Apr value of 13.40 to 13.65 now.

    As expected, the discount rose after tender deadline from about 7.7% to 9.3%. Deadline is effectively May 15 (+2day settle = May 17) since there is no guaranteed delivery, so must buy on May 15 at the latest.

    My observation is just casual. Have to run the numbers exactly to be more accurate.

    Two more 5% tenders to come.

    1. Richard Thiemann

      The market price of EIM was in the 12.30-12.50 range all of mid-April. https://www.cefconnect.com/fund/EIM

      It’s unlikely you would have lost money on tendering unless the NAV dropped below your market price between mid-April to May 15th ( assuming all shares tendered are accepted ).

      That’s the mechanism Karpus is relying on to make this arb work for them…and also likely that they hedge a large portion of the underlying muni bond exposure to protect themselves against large NAV moves…which as you pointed out is a risk and does move.

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