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written by reader Subscription Rights

By elg_66, October 12, 2019

I just got an offer from Gabelli GDV fund to purchase ”rights” for additional common shares. What does this mean?

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Travis Johnson, Stock Gumshoe

GDV is a closed-end fund, and a subscription rights offering like this is much like a secondary offering for a common stock — they give current shareholders a slight discount in order to raise more money and expand the fund.

In technical terms, it’s sort of like a warrant — you’ll get a subscription right for each share you hold, and you can buy new shares for 10 subscription rights plus $20 each. The current share price is above $20, so this is a “discount” to induce you to buy more shares at about 3-5% less than market price (and the fund trades at a 9.5% discount to NAV as well).

IT’s good for the fund manager, because it means they’ll have more shares outstanding and will earn a little more of a management fee… and since they’re raising more cash it should also serve to decrease the discount rate a little bit — though it does that by reducing the NAV rather than bringing up the share price (they’re bringing in $20 per new share in cash when the current NAV is $22.50 per share, so the NAV per share will fall a little).

The subscription rights should also trade for a little while — sounds like they’ll be tradeable for a month or so before the rights offering happens, so if you don’t want to exercise that right you can probably sell them for a few cents (as of today, with the fund at $20.64 per share and with 10 subscription rights giving you the right to buy at $20, the math would mean a subscription right should be worth about six cents).

I wouldn’t overthink it unless this is a very large holding. The right to buy more shares at $20 is not terribly valuable when the market price is $20.64 so you’re not missing out on much if you decide to think it over — think about whether you want to allocate more to this fund, not about the immediacy and deadline of the subscription rights.

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