2023-03-31 11:29:24 ET
Summary
- Center Coast Brookfield MLP & Energy Infrastructure Fund is an MLP equity closed-end fund.
- The CEN CEF has historically traded at large discounts to NAV due to its poor performance.
- The fund is currently priced at a -12% discount to net asset value.
- CEN is set to be merged into Center Coast Brookfield Midstream Focus Fund, an open-end fund, which would see its discount to NAV disappear.
- The merger is supported by activist investor Saba Capital, which has a large position in CEN.
Thesis
Center Coast Brookfield MLP & Energy Infrastructure Fund (CEN) is a MLP equity closed-end fund. The vehicle has a very poor track record, having slashed its NAV during the 2020 Covid panic due to portfolio fire-sales driven by leverage. The market "rewarded" CEN with a -30% discount to NAV post Covid, and has ticked-up to only -12% discount currently.
The fund has been pressured by activist manager and shareholder Saba to narrow the discount, and is finally taking a corporate action to address it:
NEW YORK, March 30, 2023 (GLOBE NEWSWIRE) -- Center Coast Brookfield MLP & Energy Infrastructure Fund (NYSE: CEN) announced today that its Board of Trustees approved a proposal by Brookfield Public Securities Group LLC ("PSG"), the investment adviser of CEN, to reorganize CEN into Center Coast Brookfield Midstream Focus Fund (the "Focus Fund") (the reorganization of CEN into the Focus Fund is the "Reorganization"). The Board of Trustees that oversees the Focus Fund also approved the Reorganization. The Focus Fund is an open-end fund that is a series of Brookfield Investment Funds, which is also managed by PSG using a similar investment strategy.
After careful consideration of a variety of factors and alternatives, the Board of Trustees of CEN (the "Board") determined that it would be in the best interest of shareholders to merge CEN into the Focus Fund.
The investment manager is basically proposing to merge CEN, a closed-end fund, into Center Coast Brookfield Midstream Focus Fund (CCCNX), an open-end fund. This merger is still subject to CEN shareholders' approval:
The proposal to reorganize CEN into the Focus Fund will require the approval of CEN shareholders. A special meeting of shareholders of CEN (the "Special Meeting") is expected to be held in the third quarter of 2023 to consider the proposed Reorganization. Following a constructive dialogue, PSG, CEN and Saba Capital Management, L.P. ("Saba"), CEN's largest shareholder, have entered into an agreement whereby Saba, on behalf of itself and other entities or accounts that it manages, has agreed to vote its shares in favor of the Reorganization.
As a reminder to a retail investor, an open-end fund is priced once a day at close of business on NAV only. By merging CEN into CCCNX, the investment manager is basically ensuring CEN will be priced at NAV going forward. Why? Because that is how the open-end fund market works through its legislation and regulatory framework.
Given Saba is onboard with the change from the corporate communication above, we think the corporate action will go though. If the merger were to happen tomorrow, an investor would see an instantaneous 12% gain, which is the current fund discount to net asset value.
Also to note that the merger will happen NAV for NAV. So, an investor with $100 worth of NAV in CEN will get shares equivalent to $100 worth of NAV in CCCNX.
There are a couple of steps that need to occur first though:
- approval of merger by CEN shareholders
- announcement of actual share exchange date.
Until the merger is actually consummated, an investor is still running the underlying MLP asset class market risk.
Premium/Discount to NAV
Due to its horrendous historic performance and presence of a large private asset, the Center Coast Brookfield MLP & Energy Infrastructure Fund has traded at a substantial discount to net asset value:
We can see how the discount has narrowed from -30% in July 2020 to around -12% currently. That is the market telling us it does not trust the manager and the asset class.
Risks
The risks around this strategy lie with the valuation of the KKR Eagle asset (emphasis added):
As stated in a press release issued on August 1, 2022, PSG, in collaboration with the Board, has evaluated various strategic options for CEN seeking to advance and maximize shareholder value, including, without limitation, reorganization opportunities with third parties, and strategic portfolio repositioning, including a potential sale of all or part of CEN's holding in KKR Eagle Co-Invest LP ("KKR Eagle"). Following an extensive process with a strategic advisor regarding potential sale opportunities for KKR Eagle, PSG has signed a purchase and sale agreement to sell CEN's interests in KKR Eagle. The sale of CEN's interests in KKR Eagle is expected to close tomorrow, March 31, 2023 .
We are running under the assumption this is correctly valued on the CEF's balance sheet. If this is the case then the divestiture should not impact the NAV whatsoever - you move from asset level to cash on the asset side of the balance sheet. However, if there are any "surprises" in terms of a market price lower than where the fund was valuing the asset, we can see a commensurate decrease in NAV value.
Conclusion
Center Coast Brookfield MLP & Energy Infrastructure Fund is an MLP equity closed-end fund. The fund has had a dreadful historic performance, which has seen it trade at a large discount to net asset value. The fund is currently priced at a -12% discount in market price versus net asset value.
Saba Capital, an activist investor, has a position in CEN. The asset manager is now putting forward a corporate action where CEN would be merged into Center Coast Brookfield Midstream Focus Fund, an open-end fund. This merger would result in CEN being priced at NAV only, in accordance with open fund regulations and trading market practice. The consummation of the merger tomorrow would result in a +12% net gain for a CEN investor.
However, the fund needs to obtain shareholder approval first. Until the merger is consummated, an investor in CEN still runs the MLP asset class market risk, including the valuation risk around the KKR Eagle asset. Given Saba's track record and positioning in Center Coast Brookfield MLP & Energy Infrastructure Fund, we are of the opinion that the merger will go through and shareholders will finally see their holdings priced at NAV. This is a nice merger arbitrage opportunity in our minds.
For further details see:
CEN: Don't Miss This 12% Merger Arbitrage Opportunity