JRO - JRO: Potential Merger Arbitrage Opportunities

2023-06-28 16:50:07 ET

Summary

• Nuveen is set to merge four of its floating rate loan funds: Nuveen Senior Income Fund, Nuveen Floating Rate Income Opportunity Fund, Nuveen Short Duration Credit Opportunities Fund, and Nuveen Floating Rate Income Fund.
• This consolidation is seen as beneficial for both Nuveen and shareholders, as it will allow the fund manager to have a unique offering in the leveraged loan space and could result in tighter discounts to NAV.
• The article discusses potential merger arbitrage opportunities, and provides a roadmap for JRO shareholders in light of the upcoming merger.

Thesis

A wave of consolidations is occurring in the CEF space. As we have seen with the Tekla acquisition and the Delaware funds mergers , large asset managers are consolidating AUM. As we have written before here , Nuveen wanted to merge four of its floating rate loan funds, and it has succeeded in obtaining shareholder approvals:

NEW YORK--(BUSINESS WIRE)--Common and preferred shareholders of Nuveen Senior Income Fund (NSL), Nuveen Floating Rate Income Opportunity Fund (JRO), Nuveen Short Duration Credit Opportunities Fund (JSD), and Nuveen Floating Rate Income Fund (JFR) have approved a proposal to merge the funds. The mergers will combine each of NSL, JRO, and JSD into JFR. Subject to the satisfaction of certain customary closing conditions, the mergers are expected to become effective before the market opens on July 31, 2023.

Leading up to the mergers, NSL, JRO, JSD, and JFR are expected to follow their normal distribution schedules. Following the mergers, JFR is expected to declare its regular August distribution on July 31, 2023, with a record date of August 15, 2023, payable September 1, 2023.

In essence, starting August 1st we will only have JFR as a ticker with a combined AUM of roughly $1 billion. As we can see from the below table, the Nuveen CEFs have very similar leverage ratios:

Outside some management team reshuffling / shrinkage, there is little else to be had here from a financial engineering / structuring stand-point. In fact, we would argue this is a beneficial move for both Nuveen and shareholders in the CEFs.

We see this as a positive for Nuveen since it will allow the fund manager to have a unique, segregated offering in the leveraged loan space, rather than have multiple funds with similar analytics chase the same business. Eventually down the line, this should result in tighter discounts to NAV.

For shareholders in JRO the merger is a positive since the fund did not outperform historically:

The strongest in the cohort has been JFR (which is actually absorbing the other funds), while the weakest has been JSD.

Arbitrage Opportunities

Currently, the funds are now trading with very similar discounts to NAV:

We can see how JFR rallied significantly in April, its discount narrowing to almost a 3 point differential when compared to the cohort. That arbitrage has now closed. At the end of the day, any substantial divergence here (1% plus) can be bought. Since the merger has been approved, all funds will become one, hence an investor looking to buy any of the names should enter via the one with the highest discount to NAV. Conversely, one can pursue a long/short strategy as well to isolate any arbitrage opportunities.

What should you do as a JRO shareholder

1. If you want to keep the current exposure only

If you are happy with your holdings and exposure, you do not need to do anything. There will be a NAV for NAV conversion at the end of July, and you will end up owning JFR shares with the same market value come August.

2. If you want to increase your holdings

Conversely, if you are interested in increasing your exposure to the leveraged loan asset class, you should keep an eye out for the merger arbitrage discussed above. All the above tickers can now be used interchangeably, because they will all become JFR come August. So any market dislocations that allow for any of the funds to start trading at a much wider discount than the cohort can be utilized to buy the weakest ticker. In effect, you do not need to buy JRO shares anymore, you can buy any of the four tickers above.

Conclusion

JRO is a closed end fund from Nuveen. The CEF is set to be merged into its peer JFR come August 1, 2023. In fact, there are three Nuveen CEFs with similar characteristics now being merged into JFR. From a structural standpoint, the four funds now represent the same risk, so any discrepancies in discounts to NAV can be traded as a merger arbitrage trade. If you are a JRO shareholder and happy with your exposure, you do not need to do anything else. You will get JFR shares on August 1 that amount to your current market value. Conversely, if you want to increase your exposure, you can look out for the widest discount to NAV from the four funds and purchase that ticker as a proxy for JRO. Come August, the respective ticker will also become JFR, thus you are able to increase your exposure cheaper than buying JRO outright.

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