NHS: 2023 Rights Offering Results

Author's note: This article was released to members of CEF/ETF Income Laboratory as part of the CEF Weekly Roundups on June 26, 2023, with certain numbers updated. Please check the latest data before investing.

The rights offering for Neuberger Berman High Yield Strategies Fund (NYSE:NHS) expired on June 20, 2023. We discussed this offering when it was first announced in a previous CEF Weekly Roundup (public link) and then again last week when it was about to close.

In brief, this was a 1-for-3 transferable rights offering with the subscription price of the offering being the higher of 92.5% of the average closing share price of the fund on the five days until expiry, or 89% of NAV. The preliminary results of the rights offering are now in. From the press release:

June 22, 2023 | Neuberger Berman High Yield Strategies Fund Announces Preliminary Results of Rights Offering. Neuberger Berman High Yield Strategies Fund Inc. (NYSE American: NHS) (the "Fund") announced today the completion of its transferable rights offering (the "Offer"), which commenced on May 23, 2023 and expired on June 21, 2023... The final subscription price of $7.42 per share of Common Stock was equal to 89% of the Fund's net asset value per share of Common Stock at the close of trading on the NYSE American on the Expiration Date. Based on the preliminary results, the Offer was over-subscribed. The Offer is expected to result in the issuance of approximately 6,482,227 shares of Common Stock and the gross proceeds of the Offer are expected to be approximately $48.1 million.

On the expiry date of June 21, 2023, NHS closed at a price of $7.60 and a NAV of $8.34, good for an -8.87% discount. This was still above the -11% discount floor for the offering, which meant that it was still beneficial to subscribe. The final subscription price $7.42, i.e. reaching the -11% discount floor, but this price represented only a -2.37% discount to the market price of the fund on expiry. Consistent with this, the value of the rights also fell to negligible levels as the offering drew to the close as the benefit of subscribing diminished with the widening discount.

This is why we always suggest to our members who do prefer to hold a CEF through a rights offering, but who are not intending to subscribe for new shares, to sell their rights as soon as possible on the open market (if they are transferable). We can see that the rights opened at around $0.10, but lost value quickly as the discount of NHS widened. This is because the closer the fund's discount is to the -11% discount floor, the less benefit there is to subscribing. As a reminder, should NHS have dropped below an -11% discount towards the expiry date, investors should not have subscribed as it would have been cheaper to purchase the fund on the open market.

Despite the slim discount to the market price, the offering was still fully subscribed, and so the fund will be able to grow its share count by a maximum of +33%. Additionally, the offering charged a sales load of 3.50% and offering expense of 0.92% for each newly issued share, which is extremely expensive. Although, this was down from a sales load of 3.75% and offering expenses of 1.25% last year, so... progress?

As a result, I expect that there will be a NAV hit of -$0.31 per share, or -3.74%, once the new shares are released.

June 30, 2023 update: on June 26, 2023 when the new shares were released, the NAV was adjusted downwards by $-0.25 per share, or -3.03%.

Moreover, the fund's distribution sustainability would be weakened slightly by this dilutive offering. NHS currently sports a very high distribution yield of 14.35% at market price (13.15% on NAV), but with only 49% coverage. All other things being equal, the distribution coverage would drop to around 47%. While low coverage in and of itself isn't a negative (since distributions are part of the total return), when coupled with a relatively narrow discount of under -5%, leaves open the possibility of a negative price reaction if the distribution does get cut.

Finally, our standard "sell and rebuy" strategy to sell the fund before the ex-rights date, and buy back after, worked once again:

Additionally, NHS's NAV actually rose slightly over this time frame. Therefore, the sell and rebuy strategy could have been even better if one had rotated into a comparable high-yield bond fund such as FTHY and HYB as we had suggested.

To reduce market risk, one could switch the money to other high-yield CEFs such as First Trust High Yield Opportunities 2027 Term Fund (FTHY) (-11.95% discount, a Tactical Income-100 portfolio holding) or New America High Income Fund Inc. (HYB) (-14.81% discount, an Income Generator portfolio holding) in the meantime.

Thus, up to +8% "free shares" of NHS could have been obtained by rotating from NHS before its ex-rights date into HYB, and then selling HYB now and rebuying NHS. As we always say, getting "free shares" of a CEF is better than paying for slightly discounted shares, am I right?

Going forward

NHS's current discount of -7.19% (as of 6/30) makes it fairly valued in my opinion, however, investors should be aware that the 14.50% yield of the fund is not fully covered by earnings. Investors should also remember that bidding up a fund to unwarranted premiums is generally not a good strategy as it leaves the market price of the fund susceptible to external shocks such as a rights offering announcement. Remember, as we always tell our members at CEF/ETF Income Laboratory: don't just look at the yield!

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