Tuesday, March 4, 2014

Special Opportunities Fund Announces Final Results of Redemption of Convertible Preferred Stock $SPE

Special Opportunities Fund (SPE) announced today that all of its shares of convertible preferred stock have been converted into common (or redeemed for cash), and there are now 10,165,454 shares outstanding.

Since the 4,366 preferred shares that didn't convert to common were redeemed for the cash liquidation price of $50, that should not have had an effect on the NAV per common share (which is already net of the liqudiation preference of the preferred shares). So, the February 28 NAV of $17.74 reflects full dilution and should be roughly accurate, plus or minus changes in the values of the holdings since Friday.

With the NAV of ~$17.74 and common shares trading at $16.28, the common shares are trading at ~90% of NAV. If you assume the underlying holdings are trading at a 15% discount to their NAVs, then the net discount is close to 25% off the value of the stocks and bonds (basically a diversified portfolio) that all of these closed end funds hold. It's like buying the S&P for 1400.

Part of my theory here is that Bulldog, the SPE manager, will have the fund buyback SPE shares to close the discount. According to the proxy, there are some big holders of SPE - Karpus Management owning 15% and Relative Value Partners owning 18%. With concentrated ownership, it probably wouldn't take that big of a buyback to close the gap, and it would help Bulldog's credibility in their activist campaigns against other CEFs trading at a discount.

SPE also posted the 2013 annual report last week. He said that he's

"increased its exposure to income oriented securities whose market prices have fallen much more than their intrinsic value due to fear that the Fed may 'take away the punch bowl.'"
It's funny that I've been doing the same thing but probably for a different reason. I think that an end to Fed bond purchases is bullish for bonds. He may just be doing it because pessimism about fixed income has pushed those closed end funds to have the biggest discounts (like the muni CEFs).

I made a list of 10 of the largest SPE CEF holdings, which comprise 53% of the NAV of SPE. They were trading at an average discount to their own NAVs of 12.3%.

The CEF at the biggest discount was Boulder Total Return fund, which is trading at a 21% discount to NAV. Boulder Total Return is basically a big cap equity fund, and 40% of it is in Berkshire! Boulder Total Return is 3.2% of SPE, so if you buy SPE you get 1.3% of your purchase in Berkshire shares at 30% off of market value.

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