NCZ: the suspension and resumption of distribution creates an opportunity for exchange with NCV

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Author’s note: This article was circulated to CEF/ETF Income Laboratory members as part of last week’s CEF weekly digest. Please check the latest data before investing.

NCV takes over distributions

The second piece of news to discuss is the announcement that Virtus II Convertible and Income Fund (NYSE: NCZ) has resumed its distributions. Excerpt from the press release:

NCZ Declares October Distribution; starts the payment process previously declared common stock distribution

HARTFORD, Conn., Nov. 3, 2022 /PRNewswire/ — Virtus Convertible & Income Fund (NYSE:NCV) and Virtus Convertible & Income Fund II (NYSE:NCZ) (each a “Fund” and together the “Funds”) , today announced the final results of each Fund’s voluntary tender offer (each, a “Tender Offer” and together, the “Tender Offers”) for up to 100% of its outstanding Auction Rate Preferred Shares (“ARPS”). The Tender Offers expired at 5:00 p.m., New York time, on November 1, 2022.

Based on current information, 8,902 shares (approximately 99.7% of ARPS outstanding) have been tendered to NCV and 6,452 shares (approximately 99.2% of ARPS outstanding) have been tendered to NCZ . Payment for these shares will be made on or around November 2, 2022. All ARPS of each of the NCVs and NCZs that have not been tendered remain outstanding. The purchase price for properly tendered shares is equal to 97.95% of the ARPS liquidation preference per share of $25,000 per share (or $24,487.50 per share), plus any unpaid ARPS dividends accrued up to on the expiration date of each tender offer.

As a result of the tender offer, NCZ has achieved the minimum asset coverage ratio for total leverage required by its organizational documents for the declaration and payment of dividends. The Fund will therefore begin processing its monthly distribution of $0.0375 per common share which was previously due to be paid on October 3, 2022 to shareholders of record as of September 12, 2022, with a new payment date set for November 4, 2022. In addition, the monthly distribution of $0.0375 per common share, which was originally scheduled to be declared on October 3, will be paid on December 1, 2022 to shareholders of record on November 15, 2022 (ex-dividend date of November 14, 2022).

NCZ and its sister fund Virtus Convertible & Income Fund (NYSE: NCV), have launched voluntary takeover bids for their outstanding APR Preferred Shares (ARPS). ARPS are legacy securities issued before the global financial crisis of 2007-2008 and were used by NCV and NCZ as sources of leverage. However, as noted in an earlier CEF weekly roundup, falling net asset values ​​caused NCZ to breach its 1940 Act leverage limits, forcing them to suspend distributions.

We can see this on the NCZ website showing a total leverage of 50.34% for the fund, exceeding the maximum threshold of 50% allowed to declare and pay distributions.

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Therefore, NCZ, as well as NCV in a preemptive move, bought back their ARPS to reduce their leverage ratios. This unfortunately means that the funds have deleveraged to rock bottom, weakening their asset base and making a reduction in distributions more likely than ever, as the distribution yields of +12% of the net asset value of these two funds will be more difficult. to maintain.

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Exchange opportunity with NCV

The fact that only NCZ, not NCV, suspended and resumed distribution opened up a powerful trading opportunity for investors who own NCV. NCV is trading at a discount of -6.05%, around 7 points lower than NCZ’s discount of -13.17%. This difference is likely due to investors fleeing NCZ when they announced their suspension of distribution, which led to a significant price divergence between the two funds. Now that NCZ has resumed distribution, this difference in valuation seems unwarranted given their nearly identical net asset value profiles.

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In fact, the spread between NCV and NCZ rebates has reached historically high levels.

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Portfolio allocations, which are primarily allocated to convertibles and high yield bonds, are also very similar between the two funds.

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Therefore, NCV investors are highly recommended to switch to NCZ.

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