Special Opportunities Fund 2016 Annual Report

The second half of 2016 was quite eventful for Special Opportunities Fund. In July, the Fund distributed rights to its common stockholders to purchase a new class of convertible preferred stock that raised $55.6 million. A portion of that cash was used to fund a self-tender offer that was completed in October for 1.16 million shares of common stock at 97% of net asset value. After giving effect to a year-end cash dividend of $0.81 per share and ignoring the rights offering or self-tender offer, the common shares of the Fund gained 5.13% in the six-month period ending December 31, 2016, closing at $13.65 vs. an increase of 7.82% for the S&P 500 Index. The Fund’s discount to net asset value fell slightly over the second half of 2016 from 13.08% to 12.28% (and currently is about 10%).

Here is an update on some of our significant positions.

It would be an understatement to say that our investment in Emergent Capital has been a disappointment. Emergent owns a portfolio of life insurance policies with an aggregate face value of approximately $3 billion but its actual cash flow has been significantly less than what had been projected. It has become clear that Emergent’s capital structure will need to be further modified to deal with holding company debt and operating and legal expenses and that will likely result in dilution of the common stock.

Previously on SPE. The discount to NAV is currently 9.9%. The big self-tender has tightened up the discount, but it is arguably still to wide for a closed end fund activist fund (What's Good For the Goose is Good For the Goldstein).

Also, Emergent has been a special situation investor favorite for years but has basically gotten obliterated. This is the company with the portfolio of life insurance policies, so it's short the life expectancy of a group of 600 or so people. People point to the present value of the policies, but if the insureds live longer than expected in the valuation model then the present value melts away. Capital has become expensive for Emergent and it has to continue to raise capital to pay the premiums on the policies. I have never understood why the company couldn't negotiate a deal with the insurance companies that wrote the policies to terminate them, since insurance companies have a much lower cost of capital than Emergent there ought to be a win win deal.

"Special Opportunities Fund, Inc. Announces Completion of Rights Offering" $SPE

"Based on preliminary results provided by American Stock Transfer & Trust Co., the Fund’s subscription agent, subscription requests for approximately 4.35 million shares have been received. As a result, the Fund has elected to issue an additional 290,084 shares as authorized in the prospectus. A total of 2,223,976 shares will be issued for which the Fund will receive a total of $55,599,400."

Special Opportunities Fund, Inc. Commences Rights Offering $SPE

Special Opportunities Fund, Inc. (NYSE: SPE) (the “Fund”) announced today that it will issue to its common stockholders of record as of July 21, 2016 one transferable right for every five shares of common stock held (rounded up for fractional rights) entitling the holders of such rights to purchase shares of a newly issued class of Convertible Preferred Stock.

The rights will expire on August 19, 2016 unless extended and will entitle the holder to purchase one share of a Convertible Preferred Stock at a price of $25.00 per share for each right held. The Fund anticipates that the rights will be listed on NASDAQ and the new Convertible Preferred Stock will be listed on the New York Stock Exchange. All holders of rights who fully subscribe in the offering will have the option to oversubscribe for additional shares of Convertible Preferred Stock which may be available if fewer than all rights are exercised. Additionally, if there are not enough unsubscribed shares of Convertible Preferred Stock to honor all oversubscription requests, the Board of Directors may, in its sole discretion, issue additional shares up to 15% of the shares available in the offering to honor such oversubscription requests.

The Convertible Preferred Stock will pay a dividend on the last business day of each quarter at a rate of 3.5% per annum and may be converted into common stock quarterly at a conversion price of $19.00 per share of common stock (or a ratio of 1.3158 shares of common stock for each share of Convertible Preferred Stock) adjusted for any distributions made to or on behalf of common stockholders. At any time following the second anniversary of the Expiration Date, the Board of Directors may, in its sole discretion and upon thirty days’ notice, redeem all or any part of the then outstanding shares of Convertible Preferred Stock at $25.00 per share plus accrued dividends. In addition, if the market price of the Fund’s common stock is equal to or greater than $22.00 per share, the Board may, in its sole discretion, require holders of the Convertible Preferred Stock to convert all or any part of their shares into shares of common stock at a conversion price of $19.00 per share of common stock (or a ratio of 1.3158 shares of common stock for each share of Convertible Preferred Stock held) adjusted for any distributions made to or on behalf of common stockholders. All outstanding shares of Convertible Preferred Stock as of August 19, 2021 (five years from the Expiration Date) will be mandatorily redeemed at a price of $25.00 per share of Convertible Preferred Stock held on such date plus accrued dividends.

The Board intends to use approximately one-third of the net proceeds raised in the offering to fund a self-tender offer for shares of the Fund’s common stock. The remainder of the net proceeds will be invested in accordance with the Fund’s investment objective and used for general working capital purposes.

What's Good For the Goose is Good For the Goldstein $SPE

I've mentioned the Special Opportunity Fund in the past. Just noticing that the share price is $14.27 and last Friday's published net asset value was $16.64.

So, it's trading at a 14.3% discount to NAV. It's pretty funny that the closed end fund activists have a closed end fund with a discount as big as some of the discounts they are agitating against.

SPE may be interesting right now because it's trading at a wide discount to NAV, and the closed end funds that it owns are probably also trading at wider discounts right now. So the double discount ordinarily there should now be wider.

Institutional Holders of Special Opportunities Fund $SPE

From Morningstar - the biggest are Relative Value Partners (21%), Ancora Advisors (2.5%), Blue Bell Private Wealth Management (2.3%).

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.

"Special Opportunities Fund, Inc. Announces Redemption of Convertible Preferred Stock"

Press release:

Special Opportunities Fund, Inc. (SPE) (the “Fund”) today announced that the Fund’s Board of Directors (the “Board”) has determined to redeem all outstanding shares of the Fund’s Convertible Preferred Stock on March 3, 2014 at $50 per share. In accordance with the prospectus for the Fund’s Convertible Preferred Stock, no accrued interest will be paid.

Holders of the Fund’s Convertible Preferred Stock may, until 5 pm EST on February 28, 2014, convert their shares into shares of Common Stock at a ratio of 3.7160 common shares for each share of Convertible Preferred Stock (with cash in lieu of any fractional shares of common stock). Holders of shares of Convertible Preferred Stock that do not elect to convert by 5 pm EST on February 28, 2014 will receive $50 in cash per share. Currently, the market price of the Convertible Preferred Stock is significantly higher than $50 per share. Therefore, holders of the Fund’s Convertible Preferred Stock are advised to check the market price of both the Common Stock and the Convertible Preferred Stock before determining whether to convert their shares into common stock.

"Bulldog Targets REITs For Shakeup After Javelin Win"

“Management doesn’t have a lot to stand on if the REIT’s stock is trading at 80 percent of its book value,” he said, referring to the amount assets would be worth if liquidated. In that scenario, every dollar of equity repurchased would yield a 20 percent return.

[...]“How hard is it to run a mortgage REIT?” Goldstein said this month in an interview. “I could run one in my basement.”