UBS Global Asset Management is surrendering one of its municipal bond closed-end funds following a coup by activist shareholders.
Protecting the Investment Grade Municipal Income Fund from dissident shareholders has grown too costly, UBS said in a proxy filing this month.
The company urges shareholders next month to approve a proposal to sell the fund’s roughly $255 million in assets, distribute the proceeds to shareholders, de-list from the New York Stock Exchange, and fade into history.
UBS fended off a mutiny last year from Karpus Investment Management and Western Investment, which together own 18.8% of the fund’s stock.
Karpus and Western argued the fund, ticker symbol PPM, traded at too wide a discount to the value of its assets.
Municipal closed-end funds are publicly traded baskets of municipal bonds. Closed-end funds often borrow money to juice the dividends paid to shareholders. Because of the leverage, and because the shares cannot be redeemed from the fund sponsor, their value often strays from the value of the bonds in the fund.
This fund’s share price at times was more than 20% lower than the value of its assets. Karpus and Western contended the fund’s discount was nearly the widest among funds of its kind.
The investors failed to win shareholder approval to take over seats on the board last year. They promised another battle this year.
In a proxy filing, UBS said it is no longer worth fighting against the revolt.
“Responding to shareholder proposals would likely continue to increase the expenses of the fund, to the detriment of its shareholders,” the company said in a letter to shareholders. “Proxy battles and high solicitation expenses are likely for the foreseeable future, to the detriment of the fund and its long-term investors.”
UBS did not say it thought liquidating was a good idea for any reason other than the cost of staving off Western and Karpus.
Indeed, closed-end funds are enjoying an unusually benign atmosphere at the moment.
Many closed-end funds borrowed money through auction-rate preferred shares, which typically pay interest at a rate tied to the London Interbank Offered Rate.
With three-month Libor at 0.25%, many funds are paying negligible interest on their debt. Everything they earn in excess of the interest cost is gravy for shareholders.
According to the fund’s annual report, the fund at the end of September was paying roughly 0.5% interest on its ARPS. The fund was collecting an average coupon of 5.6% on the municipal bonds it bought.
By liquidating, the fund will have to redeem the ARPS at face value and sell the bonds — sacrificing the cheap, dividend-enhancing leverage.
At the end of September, the fund reported $256 million in assets — mainly investment-grade municipal bonds.
If it liquidates, the fund would have to pay $80 million to redeem its ARPS. It also owes about $20 million on some floating-rate notes.
That leaves roughly $155.9 million for shareholders, assuming it sells all its bonds at the value recorded on its books.
The fund would be liquidating at a time when its discount has rarely been lower.Its current share price is only about 2.7% lower than its net asset value.
That means it would be eschewing its cheap leverage and nearly 6% annual dividend just to collect an extra 2.7 cents per dollar at a time when dividends that high are extraordinarily difficult to find.
Art Lipson, managing member of Western Investments, said the narrower discount reflects the expectation the fund will be liquidated. Should the liquidation plan fall through, the discount would likely widen back out, he said.
According to the proxy filing, Western and Karpus have agreed to vote in favor of the proposal.