JPT - JPC Is About To Absorb JPS And JPT: What That Means

2023-07-18 08:00:00 ET

Summary

• Nuveen has announced plans to merge the Nuveen Preferred Securities Income Fund and Nuveen Preferred and Income Fund into the Nuveen Preferred & Income Opportunities Fund.
• I briefly review each CEF, including how they invest currently. I then combined their holdings to come up with my pro forma of what JPC will look like post-merger.
• I provide actionable paths forward for holders of each of the three CEFs. In short, stay the course.

(This article was co-produced with Hoya Capital Real Estate )

Introduction

"Bigger is better" is the current mantra among Closed-End-Fund managers, driven by the need to be competitive on fees. A single, larger CEF is cheaper to run than multiple smaller ones all focused on the same investment universe and strategy. Such is the case with Nuveen's announcement to merge the Nuveen Preferred Securities Income Fund ( JPS ) and Nuveen Preferred and Income Fund ( JPT ) into the Nuveen Preferred & Income Opportunities Fund ( JPC ).

After briefly reviewing all three as they currently stand, I constructed what the new JPC should hold post-merger based on the latest data available. I will also list what strategy options exist for holders of each CEF. While I said they have merged, the final vote of approval is scheduled for 8/9/23. If Nuveen feels it would fail, the vote most likely will be delayed until Nuveen knows it will pass; I have seen that before.

Nuveen Preferred Securities Income Fund overview

Seeking Alpha describes this CEF as:

The fund primarily invests in investment grade preferred debt securities, convertible debt securities, and convertible preferred securities that are rated BBB/Baa or better by S&P, Moody's, or Fitch. The Fund’s primary investment objective is high current income consistent with capital preservation. The Fund’s secondary investment objective is to enhance portfolio value relative to the market for preferred securities by investing in securities that the Fund’s sub-adviser believes are underrated or undervalued or sectors that the Fund’s Sub-Adviser believes are undervalued.

Nuveen Preferred and Income Fund overview

Seeking Alpha describes this CEF as:

The Fund seeks to provide a high level of current income and total return. The Fund invests at least 80% of its managed assets in preferred and other income-producing securities. The Fund may invest without limit in below investment grade securities. Up to 40% of its managed assets may be in securities issued by companies located anywhere in the world. The Fund does not invest in contingent capital securities (“CoCos”). The Fund has a 5-year term and intends to liquidate and distribute its then-current net assets to shareholders on or before 1 Mar 2022.

JPT changed their game plan and obviously did not terminate in 2022.

Nuveen Preferred & Income Opportunities Fund overview

Seeking Alpha describes this CEF as:

Nuveen Preferred & Income Opportunities Fund seeks to provide high current income and secondarily, total return, by investing at least 80% of its managed assets in preferred and other income producing securities, including hybrid securities such as contingent capital securities and up to 20% opportunistically in other securities, primarily income-oriented securities such as corporate and taxable municipal debt and common equity. At least 50% is invested in securities that are rated investment grade (Rated BBB/Baa or higher by a nationally recognized statistical rating organization – S&P, Moody’s, Fitch - at the time of purchase or, if unrated, judged to be of comparable quality by the Fund's portfolio team.) The Fund uses leverage.

Current CEF factors

Estimated merged JPC CEF

This document provides information related to how JPC invests its assets and potential investors should take a look. Using the latest data I found, this is how I calculated JPC to look post-merger, starting with the biggest Issuers.

The second largest class is Contingent Capital which is a type of facility or instrument that automatically converts into equity when a certain stress-related trigger is breached, meaning that (typically) private investors provide an automatic boost to loss-absorbing capital at the time when it is most needed.

An important feature to mention with Financial preferreds dominating the portfolio is most, if not all, are non-cumulative in nature.

I come up with a weighted-average-rating between BBB- and BB+, slightly lower than what Morningstar states. The expected Top 20 holdings should be the following, which come to 27% of portfolio which will hold about 380 different assets.

The Count column indicates how many of the three CEFs held that asset.

JPC has cut their payout twice in 2023; hopefully with the current 105% ratio, another cut will not occur. Nuveen has a pair of managed distribution polices, which JPC uses I could not determine. More details are provided in their Understanding managed distributions document.

Both the price and NAV recovered some from COVID but still stand about 25% below levels seen in 2019. Since early 2021, FOMC actions have driven both back down to levels that COVID caused but still above the depths hit during the GFC of 2008-09. Most experts think we have more rate hikes coming to bring inflation down to the 2% target level.

Actionable paths forward

The most obvious one is to vote for the merger and let Nuveen handled the transaction, which is considered a tax-free event except for fractional share liquidation versus if you sell your holdings. Since Nuveen wants this to happen, their proxy materials lists reasons why they believe this is good for their investors and then, naturally, for themselves.

• Assuming that each Merger is completed, lower net operating expenses (excluding the cost of leverage) due to the larger size of the combined fund and additional breakpoints of the combined fund which are expected to result in a lower effective management fee rate, as well as certain fixed costs being spread over the combined fund’s larger asset base. The pro forma indicates an 8bps saving.

• Greater secondary market liquidity and improved secondary market trading for common shares as a result of the combined fund’s greater share volume, which may lead to narrower bid-ask spreads and smaller trade-to-trade price movements.

• The potential for a narrower trading discount for Target Fund common shares as a result of the larger size of the combined fund and the Acquiring Fund’s common shares trading at a discount that, on average, historically has been lower than that of Preferred & Income Securities’ common shares and lower over the prior twelve months from March 2023 than that of Preferred and Income’s common shares.

• Increased portfolio and leverage management flexibility due to the significantly larger asset base of the combined fund.

The materials also listed how the CEFs differed in the past.

• Each Fund has an investment objective that includes providing high current income. Preferred and Income’s and the Acquiring Fund’s investment objective also includes total return.

• The Acquiring Fund historically has had a higher effective leverage ratio than Preferred and Income, and to the extent the combined fund following the Mergers maintains a higher effective leverage ratio than the historical effective leverage ratio of Preferred and Income, an investment in the combined fund would be subject to a heightened level of leverage risk than an investment in Preferred and Income.

• JPC and JPS have sold Preferred shares as part of the leverage assets; JPT did not. They also had limits on non-IG assets; JPT's limit applied to B-rated or lower assets.

Another path is selling all or any of the three Nuveen CEFs currently held as maybe there are better CEFs to pick from. Here is how JPC has done compared to two popular PIMCO CEFs and the closest Nuveen fund with a long history.

• PIMCO High Income ( PHK )
• PIMCO Corporate & Income Opps ( PTY )
• Nuveen Multi-Market Income ( JMM )

Nuveen's JPC has had a very poor comparison to the others over the past year, making their 5-year CAGR the worst; their 10-year CAGR only trails PTY though. A great question to ask is why?

A third path would be to buy shares in JPS and/or JPT expecting post-merger bump in what they are worth based on how the merger incorporates the discount differences between those CEFs and the acquiring CEF's discount. This explains how the share conversion is calculated.

My understanding is the holders of the CEF with the largest discount come out best but I have not been able to confirm that. With all three discounts close, the effect will likely be small.

Final thought

For those who want to see how JPC has changed since last September, check out my JPC: A Mixed-Asset Income CEF From Nuveen Available At A Discount article.

For further details see: