RSF - RSF: Rights Offering Results

Summary

• RSF announced the results of its rights offering.
• The offering was oversubscribed, allowing RSF to expand its share count by +33%.
• The combination of the rights offering with the interval structure makes for some interesting trading possibilities.

Author's note: This article was released to CEF/ETF Income Laboratory members as part of the CEF Weekly Roundup on February 6, 2023. Please check the latest data before investing.

RiverNorth Capital and Income Fund ( RSF ) has announced the final results of its transferable rights offering, which expired on January 27, 2023 . We missed the announcement of this offering when it was first reported on December 21, 2022. In brief, this was a transferable 1-for-3 with a subscription price being the higher of 90% of NAV or 95% of the market price of the stock at expiry. The ex-rights date was January 5, 2023.

RSF, formerly known as RiverNorth Specialty Finance Corporation, was last covered by Nick (a member of the CEF/ETF Income Laboratory team) here: RSF: New Name, Same Fund ( public link ). However, the fund's strategy remained the same after the name change, which is to invest in "credit instruments, including a portfolio of securities of specialty finance and other Financial companies".

Nick discussed the possibility of a rights offering in his previous article, which has indeed come to pass:

The fund is small and will continue to get smaller due to the interval structure, plus the fund's distribution policy is also conducive to a slow liquidation. They could grow by issuing new shares in an at-the-market offering or through their dividend reinvestment program. ATMs and DRIPs can be done at a premium, which would benefit as it would be accretive. They could also utilize a rights offering. I mention this because they recently filed an N-2 . In fact, several of the RiverNorth funds just filed an N-2. In this way, they leave their options open for conducting ATMs and/or rights offerings.

What's curious about this rights offering is that RSF is, as mentioned above, an interval fund that repurchases 5% of its NAV every quarter. The repurchase is at NAV, means that an investor who tenders their shares at a discount (latest discount is -4.93%) stands to gain instant alpha on the portion of their shares that are repurchased by the fund. This interval structure is positive for shareholders because the ability to cash out discounted shares at NAV is a mechanism that acts to keep the share price of the fund from drifting too far below its NAV.

In most recent quarterly tender exercise , which expired on January 4, 2023, 460,015 shares were submitted for redemption and 168,916 shares were repurchased, giving a pro-ration factor of 36.72% This is a high pro-ration factor (considering only 5% of shares were to be repurchased), reflecting the fact that only 13.62% of shareholders submitted their shares for tender. Why so few? The answer is that RSF was trading at a slim -1.92% discount before expiry. Hence, tendering shares at that discount would gain "only" 2% of alpha when they are accepted for repurchase by the fund at NAV. 2% is better than nothing, of course, but it is less than the magnitude of alpha that is usually attainable in other tender offers that we have seen.

Right after the tender offer expired though, the discount collapsed. This is because the shares instantly became less valuable without the quarterly tender offer attached, and in addition, the ex-rights date was just around the corner. As we know, rights offerings tend to depress the share price of CEFs over the offering period, and this was no exception.

For the rights offering, the final subscription price was $15.84, equating to 90% of the NAV of the fund at expiry, meaning that the floor of the subscription price was reached. (The subscription price was the higher of 95% of market price or 90% of NAV). As we can also see from the chart above, the -10% discount floor acted as a magnet drawing the price of fund towards it as the offering expiry date approached. However, the floor was not actually breached with a low of -7.85% discount reached just before expiry.

The offering was still oversubscribed , allowing the fund to expand its share count by the maximum of +33%, while causing a NAV hit of around -2.50% per share due to the dilution effect. We can see that the NAV of the fund was probably adjusted on February 1, 2023, the day after the new shares were issued to shareholders, with the NAV falling from $17.65 to $17.19 (-2.61%) on the day.

RSF is a relatively small fund at only $64 million in net assets, so it made sense to use a rights offering to expand a fund.

I do wonder whether RiverNorth will make the rights offering for RSF an annual event, just as it does with RIV and OPP. What's curious for RSF is that it is the only fund that is an interval fund. Each year, up to 20% of its NAV will be repurchased due to its 5% quarterly tender offers, but the fund is counteracting this shrinkage by expanding its AUM by +33% (slightly less due to the dilutive effect of the offering) using a 1-for-3 offering.

The combination of the rights offering with the interval structure does make for some interesting trading opportunities. The idea would be to employ the "sell and rebuy" strategy RSF when it announces its rights offering. We have observed at the Income Lab that the amount of "free shares" that one could gain using this strategy has typically resulted in greater gains than the act of subscribing (i.e. paying) for new shares at a slight discount.

Then, in the periods between the annual rights offering exercises, one could take part in the quarterly tender repurchase offers to generate alpha from tendering shares at NAV.

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