Special Opportunities Fund (SPE)

[giofranchi]

I know that most of you don't like investing in funds. But the Brooklyn Investor is very good, and I would read his latest idea.

 

giofranchi

Special_Opportunities_Fund_SPE.pdf

[Hielko]

Interesting idea. Reading the latest annual report, and seems like they are doing a lot of sensible things to create value.

[Cunninghamew]

First thanks for adding this GIO - it is pretty interesting and I think their reports are a worthwhile read even if you are not interested in owning SPE

 

Now to my question...

 

SPE has gapped down yesterday bc they have a convertible pref. that is being converted into common shares. At first this made a lot of sense to me, bc it is dilution... now I am starting to wonder how big the impact actually is

 

My question is what impact does the conversion have on NAV for SPE?

 

At first I thought I should take the old NAV ($18.22 as of 1.31.14), which multiplied by common outstanding (7,451,042) gives you a value of $135,757,985.24.  There are 734,847 converts outstanding that convert into 3.716 shares each (or 2,730,691). So the new denominator would be 10,181,733 shares outstanding. If you divided the $135mm by this number you get NAV per shares of $13.33. 

 

Obviously, there was a flaw in the above methodology, because the shares only traded down to $15.90.

 

Then I looked at the balance sheet in the last semi-annual to try and understand where I went wrong. Looks like I was double counting, because the preferred was already being treated as a liability.  I.e.  NAV = Assets - liabilities - pref

 

Can someone please help me reconcile the move in SPE? My guess is it has to do with the pref being held on the balance sheet for less than the actual obligation.

 

 

 

[Hielko]

What you are missing in your math is just a small detail: in the NAV calculation only the par value of the prefs is included, not the value of the option to convert.

 

That the market reacted fairly significant to the conversion isn't very rational; that this would happen should/could have been known since the preferred were introduced. See for some more background this post on my blog that I wrote more than a year ago: http://alphavulture.com/2012/10/03/special-opportunities-fund-spe/

[writser]

Yeah, the preferreds are on the books as a liability at face value. The fund provides here how many preferreds are still outstanding. Before the redemption announcement, in the latest semi-annual, the numbers were (roughly):

 

* 0.75m preferred outstanding, face value $50.

* 7m normal shares outstanding

* 173m assets

* 3m liabilities

 

So NAV according to the books was (173 - 3 - .75*50) / 7.06 = 18.77$. After all preferreds are converted that liability is gone but there are .75 * 3.716 = 2.79m extra common shares outstanding. So after the conversion NAV is:

 

(173 - 3) / (7.06 + 2.79) = 17.26$

 

It's just an accounting gimmick, the NAV in the base case was overstated because the liability of the preferreds was recorded at face value ($50) but had a higher actual value since they could be converted.

 

The numbers look a bit extreme now because the actual NAV at the time of the redemption announcement was around 18.30$, which makes the conversion ratio more reasonable. Right now we're somewhere in between these two scenarios. Alphavulture has some nice blog posts about this. He can correct me if I'm mistaken.

[fenris]

He is an interesting guy, very oldschool. Recommend reading his letters to Landis of SVVC to get a sense of how he thinks (should be on seekingalpha and in the 13Ds).

[no_free_lunch]

I noticed that the discount to NAV is around 13% now.  When I looked at this a year ago or so it was 8%.  No doubt this is the result of fairly lackluster performance.  However, given that they specialize in shrinking discounts on other closed end funds does it not seem reasonable they would do so on themselves?  Naive thinking?

[CorpRaider]

They did recently modify the buyback authorization so that they can buyback stock anytime it is below NAV.  Obviously, lots of CEFs have been selling off relatively hard and are trading at pretty big discounts and most of the portfolio is comprised of other CEFs.  There are some Brookfield ones with > 15% discounts.

[no_free_lunch]

They did recently modify the buyback authorization so that they can buyback stock anytime it is below NAV.  Obviously, lots of CEFs have been selling off relatively hard and are trading at pretty big discounts and most of the portfolio is comprised of other CEFs.  There are some Brookfield ones with > 15% discounts.

 

Good to know, I had no idea there was a general sell-off.

[Hielko]

Think this is starting to look interesting. Clearly a 13% discount is not sustainable if you are in the business of buying fund just like that and then agitate for change to shrink the discount.

[Guest MarkS]

I'm also puzzled as to how he gets away with having significant discounts to NAV with his fund.  SPE's one and three year Z Statistics are both hovering around -1.9. Certainly not expensive. But not a screaming bargain either relative to its recent discount history. The fund has traded at relatively large discounts off and on for quite some time.