TEAF - TEAF: A Term Infrastructure Fund With A Deep Discount Attractive Distribution Rate And Activist Ownership

2023-10-30 11:34:27 ET

Summary

• CEF activist Saba Capital is buying TEAF, potentially narrowing its high discount.
• Infrastructure and renewable energy stocks have underperformed in 2023 due to rising interest rates, market psychology, higher inflation, and recession concerns.
• Despite the recent selloff, analysts believe infrastructure and renewable energy stocks are attractive for long-term investors.

• The Ecofin Sustainable and Social Impact Term Fund (TEAF) is a term CEF that invests in energy and social infrastructure projects with a mix of public and private investments.
• CEF Activist Saba Capital has been buying TEAF which may act as a catalyst to narrow the high discount.

Infrastructure and renewable energy stocks which were stock market darlings back in 2021, have been hit hard in 2023. The iShares Global Infrastructure ETF ( IGF ) is down about 8% year-to-date and the iShares Global Clean Energy ETF ( ICLN ) is down 34%.

There are several factors that explain the underperformance of these sectors relative to the broader market:

• Rising interest rates: Higher rates makes it more expensive to borrow. Infrastructure and renewable energy companies have large capital expenditure budgets.
• Change in market psychology: The market overvalued these sectors in 2021 which were then somewhat of a fad. Now the opposite is occurring and sentiment is very negative on these sectors.
• Higher inflation: Drives up the cost of raw materials and labor. This puts a squeeze on company margins.
• Recession concerns: There are growing concerns that the economy could be heading toward a recession which could lead to a decline in demand for infrastructure and renewable energy services.

Aside from these general factors, there are specific concerns that have weighed on ( NEE ) and ( NEP ) which are large companies in the sector. In August 2023, NEP reduced its annual unit distribution growth rate target from 12% to 5%-8% through 2026. This caused a big drop in the price of NEP and NEE which owns a majority of the NEP stock.

Despite the recent selloff, many analysts believe that infrastructure and renewable energy stocks are attractive for long term investors. These sectors are well positioned to benefit from powerful long term trends such as the urbanization of the global population and the transition to clean energy.

In this article, I discuss TEAF which is a term CEF that seem well positioned to benefit from an eventual recovery in infrastructure-based investing. It has an attractive yields, sells at a large discount and has closed-end fund activists with significant holdings.

Ecofin Sustainable and Social Impact Term Fund

Ticker: ( TEAF )

Inception Date: March 27, 2019

Total Investment Exposure: 227 Million

Total Common Assets: 197 Million

Effective Leverage: 13%

Baseline Expense Ratio= 1.63%

Discount= -23.92%

Average 6 month discount= -19.37%

Annual Distribution Rate (market price) = 9.70%

Current monthly distribution= $0.09

Annual Distribution= $1.08

Expected Termination: March, 2031

Investment Objectives

TEAF investment objectives are to provide:

• Total return with emphasis on current income and uncorrelated assets.
• Access to different kinds of essential assets investments
• Investments in tangible, long-lived assets and services
• Ability to make a positive social, environmental and economic impact
• Provide simple tax filing- one 1099, no K-1s, no UBTI

Managed Distribution Policy

The fund has adopted a managed distribution policy. Annual distribution amounts generally fall in the range of 6% to 8% of the average week-ending net asset value per share for the prior fiscal semi-annual period. Distribution amounts are reset both up and down to provide a consistent return on trailing NAV. Under the managed distribution policy, distributed amounts are normally reset in February and August, with no changes in distribution amounts in May and November.

TEAF Portfolio Profile

TEAF Has A Term Feature- Liquidation in 2031

The Fund's Board may elect to do an "Eligible Tender Offer" to purchase 100% of the outstanding shares at NAV within 12 months of the termination date. Following the tender offer, the Fund must have at least $100 million of net assets remaining to ensure viability if they want to eliminate the termination date and cause the fund to have a perpetual existence.

Either way, any investor who wants to receive 100% of NAV can receive it on or before the liquidation date.

Fund Management

TEAF is a multi-strategy fund and uses a team management approach.

The fund may invest up to the following percentages of its total assets:

• 40% in directly originated loans

• 25% in direct placements in restricted equity securities in listed companies

• 25% in direct equity investments in unlisted companies

• 30% in securities of non-U.S. issuers, including Canadian issuers

Leverage Policy

Leverage as a percent of total assets varies depending on market conditions, and normally ranges between 10%- 15%.

The fund has been using all floating rate leverage which has recently hurt performance somewhat. They were paying an interest rate of 6.16% as of May 31, 2023 which represented about 12% of total assets.

TEAF -Institutional Ownership

Institutional investors own about 37% of the shares outstanding. The largest holder is Atlas Wealth LLC which owned $12.6 million as of June 30, 2023. They are a wealth advisor firm that allocates a lot of assets to closed-end funds.

The next largest holder was Saba Capital Management, the well known closed-end fund activists, that owned $10.2 million. Other institutions that focus on closed-end funds and also own TEAF are Shaker Financial Services, Matisse Capital and Thomas J. Herzfeld.

Source: Nasdaq: Stock Market, Data Updates, Reports & News

TEAF Investment Performance: NAV Return as of 10/27/2023)

YTD - 3.49%

1-Year - 0.47%

3-Year + 5.28% annualized

TEAF- Two Year Discount History

Note that the current 24% discount is at an all time high, even though TEAF is within eight years of the termination date in March 2031.

The TEAF discount seems too high given the termination date in 2031, since you get a tailwind of more than 3% a year as we approach termination.

Given the volatile markets we have now, the discounts to NAV can vary quite a bit on a day to day basis. I think it pays to have TEAF on a watch list and gradually scale into positions by waiting for opportunities when the discount widens on any given day.

The TEAF discount has increased from 15% to nearly 24% over the last year.

Market Liquidity

TEAF is fairly liquid, and trades about 27,000 shares a day. Some care should also be taken with TEAF to use smaller limit orders. The bid-asked spread is usually around three cents, and can go higher at times.

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