We discussed the RiverNorth Opportunities Fund’s (RIV) rights offering results in last week’s Weekly Closed-End Fund Roundup for our members and I wanted to share these results with our public readers as well, together with a timeline of the main dates involved and the things that an investor might look out for next time. As of November 18, RIV closed with a discount of -3.97% and a market yield of 14.87%, paid monthly.

For separate analyses of the merits of owning RIV as an investment, please see our past reports here and here.

The offer

This was a transferable 3-for-1 rights offering with the subscription price being the higher of 95% of NAV at expiration or 95% of the average market price for the last 5 days preceding expiry.

The subscription price per share of common stock will be determined based upon a formula equal to 95% of the reported net asset value or 95% of the market price per share of common stock, whichever is higher on the Expiration Date (as defined below). Market price per share of common stock will be determined based on the average of the last reported sales price of a share of common stock on the NYSE for the five trading days preceding (and not including) the Expiration Date. The subscription period will expire on November 3, 2020, unless extended by the Board (the “Expiration Date”).

(Source)

As we discussed with our members when the offering was first announced, this is a shareholder-friendly formula as it limits the extent of dilution of the fund.

At the same time, we also noted that it would not be economical to subscribe if the discount is wider than -5% towards expiry, since you could simply buy the fund for cheaper on the open market.

This formula also means that it is not economical to subscribe if the discount of the fund is wider than -5% towards expiry. RIV last closed with a -5.18% discount, meaning that the offering already seems to be heading towards a failure from the get-go. A failure for RiverNorth that is, but good for shareholders!

Muted ex-rights day drop and (nearly) worthless rights

We also predicted that there would not be a significant drop of the share price on ex-rights day, since the rights themselves would not be worth very much at pricing of the fund then.

This also means that the ex-rights day drop tomorrow should be muted, as one would not expect the rights to be worth very much, if at all. We have previously recommended selling a fund before the ex-rights date to avoid any complications arising during the offering period, but it might not make a huge difference in the case of RIV this time around.

Indeed, this was what transpired and the ex-rights date drop (on October 1) was barely noticeable.

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Just like we saw with the recently concluded rights offering for RiverNorth/DoubleLine Strategic Opportunity Fund’s (OPP), the anticipated subscription discount seemed to be a magnet drawing the price of the fund towards it.

Chart

Moreover, our general recommendation to sell the rights as soon as possible was validated once again as despite opening at over 4 cents at the commencement of the offering period, the rights price dropped to a measly 1.1 cent a mere week later.

(Source)

Rights offering results

This rights offering was initially due to expire on November 3, but was extended to November 6 in order to avoid a clash with the US elections. We discussed in a previous Roundup about how OPP’s previous rights offering was woefully undersubscribed (only around 10%) due to the fund’s use a shareholder-friendly subscription formula that limits the extent of dilution.

We saw something similar happen with RIV’s offering. Only 575,706 new shares will be issued out of 3,140,136 authorized, corresponding to a subscription rate of only 18%. Better than OPP’s offering, but probably not what the managers were hoping for.

RiverNorth Opportunities Fund, Inc. (NYSE: RIV) (the “Fund”) is pleased to announce the successful completion of its transferable rights offering (the “Offering”) and the final results thereof. The Fund will issue a total of 575,706 new common shares as a result of the Offering, which closed on November 6, 2020 (the “Expiration Date”).

The subscription price of $14.08 per share in the Offering was established on the Expiration Date based upon a formula equal to 95% of the Fund’s reported net asset value per share on the Expiration Date. Gross proceeds received by the Fund, before any expenses of the Offering, are expected to total approximately $8.1 million.

(Source)

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The reason for the low subscription rate was that the subscription price was calculated based on being the higher of 95% of NAV or 95% of the average market price for the last 5 days upon expiration, which turned out to be $14.08 (95% of NAV). However, the fund closed that day at $14.13. In other words, it was only marginally cheaper to subscribe for the fund (assuming you have rights) than to buy the fund on the open market. It would appear that hence most investors avoided the hassle of subscribing at all, which could involve broker fees as well as locking up capital for a period of time.

While this is a “bad” result for RiverNorth, it is a good result for shareholders because the dilution effect is minimized. A quick estimate is that the newly issued shares will cause only a -0.3% NAV hit. Going forward, RIV with its -3.32% discount and 14.82% yield is fairly valued and still a viable option for those looking to harness RiverNorth’s expertise in a CEF-of-CEFs wrapper, although do note that the high yield is a result of the fund’s managed distribution policy and is poorly covered by earnings.

Looking forward

RIV has a history of conducting rights offering whenever the fund reaches a premium. The next time this happens should serve as a warning to RIV investors that an offering could be just around the corner, and possibly to lighten up their position if they want to avoid the share price decline that would occur upon such an announcement.

(Source: CEFConnect)

A member asked about the effect of rights offerings on the distribution stability of the funds in the chat. Generally, a dilutive rights offering (and both RIV and OPP’s offerings use slightly dilutive formulae) will weaken the distribution stability of a fund on a per share basis. The converse is true for an offering that uses an accretive formula. The good news is that since both RIV and OPP should not see much expansion of their share counts, the dilutive effect should be minimal and hence distribution stability should not be greatly impacted. That said, both funds are overdistributing so we will likely see lower distribution levels ahead given that the NAV base is significantly lower compared to in the past. Hence, the fund’s current 14.87% yield should not be considered as “safe”.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.



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