Author’s note: This analysis was released to members of the CEF/ETF Earnings Lab as part of the CEF Weekly Digest on May 23, 2022, with some figures updated.
The Gabelli Global Utility & Income Trust (NYSE: GLU) are out with an offer of rights.
Here are the main terms of the offer:
- Each shareholder will receive one transferable right (the “Right”) for each common share held on the record date (May 12, 2022).
- Four Rights plus $16.00 (the “Subscription Price”) will be required to purchase one additional Common Share (the “Primary Subscription”). The purchase price will be payable in cash.
- Shareholders as of the record date who fully exercise their primary subscription rights will be eligible for an oversubscription privilege. This privilege entitles such shareholders to subscribe, subject to certain limits and pro rata allocation, for any additional common shares not purchased pursuant to the principal subscription. Rights acquired on the secondary market cannot participate in the oversubscription privilege.
- The Rights are expected to trade “when issued” on the NYSE American beginning May 10, 2022. The common shares of the Fund are expected to trade “ex-Rights” on the NYSE American beginning May 11, 2022. The Rights are expected to begin trading for normal settlement on the NYSE American (NYSE American: GLU RT) on or about May 17, 2022.
- The Offer expires at 5:00 p.m. Eastern Time on June 23, 2022, unless extended.
It’s a transferable 1 for 4 offer with an ex-rights date of May 11, 2022 and an expiration date of June 23, 2022. Like other Gabelli rights offerings, but unlike most other CEF rights offerings, GLU’s subscription price is fixed, at $16.00.
The fund’s price has underperformed its net asset value by approximately -5% since the announcement of the offering, again supporting our recommended “sell and buy” strategy for funds announcing rights offerings.
GLU closed on June 3, 2022 at a share price of $17.10 and a net asset value of $19.01, giving a discount of -10.05%. The share price is $1.10 above the fixed subscription price of $16, which means that if one subscribed today, you would only get new GLU shares at a discount of -6 .4% from the current market price of the fund.
Due to the fixed subscription formula, the value of the rights is highly sensitive to the distance above (or below) GLU from the fixed subscription price of $16. It is important to note that if the GLU falls below $16 on the expiration date, you must not subscribe because it would be cheaper to buy the fund on the open market. At that time, the rights would also become worthless.
When the rights first traded last week, GLU’s stock price was only about $0.50 above $16. This meant that the rights only had an intrinsic value of about $0.125. Yet the price of the rights was trading much lower than that (at around $0.03), meaning the rights were trading well below their intrinsic value. As previously explained for other similar offerings, this is likely due to the risk that the rights will lose their value if the stock price drops below $16.
Now, the reverse is also true; if the price of GLU’s stock appreciated, the rights would increase in value. We saw this happen last week; with the price of GLU appreciating to over $17, the rights also rose sharply in value.
At the current price, the Rights have an intrinsic value of approximately $0.275. This means the rights are still significantly undervalued at their last close of $0.15. This should suggest that if one is bullish on the markets and on GLU in particular, then buying the rights here could be a potentially profitable strategy if GLU continues to rise. Importantly, we should expect the rights to rise towards their intrinsic value as the expiration date approaches, as long as GLU is trading comfortably above $16 by then.
The fact that rights are still trading well below their intrinsic value suggests that the upside and downside probabilities are asymmetric. This means that the market thinks there is a greater chance of the rights becoming worthless than of exploding in value. This is expected as CEFs tend to exhibit negative price pressure during the rights offering period. In the case of the GLU offering which has a fixed subscription plan, we also have to deal with the risk of global market movements.
Offer expires June 23, 2022. If GLU is trading comfortably above $16 in the final days before expiration, we might take another look to see if the rights are still discounted to potentially run an arbitrage play.
GLU is a global equity fund focused on the utilities sector. Its major holdings include National Fuel Gas Company (NFG), Swedish Match (OTCPK:SWMAF) (OTCPK:SWMAY), AES Corp. (AES) and NextEra Energy Partners (NEP).
GLU last closed at a discount of -10.05% and a market payout yield of 7.02%, paid monthly. It uses 38% leverage and charges a base expense ratio of 1.39%.
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