Swiss Helvetia Fund (SWZ) – Expected Tender Offer – 9% Upside

Current Price: $8.02

Tender Price: $8.73

Upside: 5% – 9%

Expiration Date: 31st of Oct, 2019

Proxy Document

This idea was shared by Ilja.

 

SWZ is a Swiss equity focused CEF. The company is controlled by Bulldog Investors (4 out of 5 seats, yet less than 2% ownership), which is now pushing for significant changes in SWZ investment strategy and intends to become its manager. In essence, Bulldog wants to make SWZ into a similar permanent capital vehicle as their controlled Special Opportunities Fund (SPE) and in turn collect sizeable management fees. Shareholders’ approval is still pending.

If the proposed changes are approved by shareholders, SWZ will launch tender offer for 15% of the outstanding shares at 95% of NAV. Based on the results of the previous tender offer and the discount to NAV at which SPE is currently trading (9% vs 12% for SWZ), I believe this situation could bring a quick 5%-9% profit in a month. This upside assumes majority of shares getting accepted in the tender at 9% premium to current prices as well as narrowing of the discount in alignment with SPE.

Shareholder meeting was initially set for the 3rd of October, but the company adjourned it till the 31st of October without much elaboration. My guess is that the quorum threshold was not reached (50% participation requirement). On the positive side, SWZ stated that so far they have received more votes in favor than against on all matters to be voted at the meeting.

Downside is limited as the discount to NAV currently stands at historically high levels and exposure to NAV can be hedged by shorting EWL ETF – similar portfolio composition (here and here) and high historical share price correlation.

 

Planned SWZ Changes and Approvals

To improve the performance of the fund and reduce discount to NAV, Bulldog wants SWZ to stop focusing only on Swiss equities and and to take on an activist role in managing its investments. Together with these amendments Bulldog requires to be appointed as an asset manager for the tender offer to take place.

All of that means that SWZ will become very similar to Special Opportunities Fund which Bulldog has been in running since 2009 (Bulldog has exited most of its 15% position in the last offer and now owns less than 2%). SPE discount to NAV stands at 9%. SPE’s expenses ratio is quite similar to the one proposed for SWZ – 1.91% vs 1.96% respectively. With the same asset manager, similar investment strategy and similar fee structure I would expect SWZ discount to narrow to the levels of SPE (i.e. 12% >> 9%).

I believe shareholders will also view these changes positively and approve them especially with the backdrop of SWZ lagging behind its peers in terms of discount to NAV for a number of years. However, worth mentioning that the expense ratio would actually increase compared to current levels – from 1.49% to 1.96%. And although higher ratio is fully justified by new activist investment strategy – which requires more time from asset manager and is expected to result in higher returns for shareholders – some shareholders might view this negatively.

 

Expected Proration and Previous Tender Offer

Previous SWZ tender offer was launched a year ago right after Bulldog Investors took control of the board. The tender was for 65% of the outstanding shares at 98% of NAV. Proration ended up at 94.5% – meaning that almost all of the current SWZ shareholders were not willing (or were simply unaware/ignorant) to exit their positions at 98% of NAV.

Assuming the shareholder base has not changed much during the last year, I do not see them jumping ship with the pending prospects of the new investment strategy and at an even lower price point (95% discount to NAV vs 98% previously). Which leads me to conclude that the current tender offer, even-though for only 15% of the outstanding shares, has relatively good chances of ending up with high proration factor (i.e. majority of tendered shares will be accepted). Counterargument  to this line of thought is that the discount to NAV is far wider currently (12%) than during the expiration of the previous tender (4%).

Last year’s tender announcement resulted in 3% narrowing of the discount to NAV. However, that tender was far larger in size and was coupled with additional special dividend. I do not think similar effect should be expected this time.