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.

2 COMMENTS

  1. fishwithwings

    Do I understand it correctly: the next hundred 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.

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