Saba Capital Management, Boaz Weinstein’s white-hot credit hedge fund, is holding a Wall Street merger hostage — again.
Last month, Morgan Stanley announced it was buying for $7 billion money manager Eaton Vance, which oversees more than two dozen closed-end funds.
Saba built positions in several Eaton Vance bond vehicles and launched proxy contests that threaten to disrupt the pairing — if the funds’ stewards don’t act to reduce or eliminate persistent discounts to the funds’ net asset values, or NAVs.
This may sound familiar. A similar Saba campaign earlier this year prepared to gum up Franklin Resource’s $4.5 billion purchase of Legg Mason by wading into the latter’s closed-end funds.
Unlike their open-end cousins, closed-end funds issue a fixed number of shares at their IPOs that soon trade hands at premiums (higher prices) or discounts to their NAVs. Big markdowns often attract activist investors like Saba, who figure they can cajole fund boards to shrink or eliminate those discounts, typically via tender offers or other tactics, thus generating big profits.
The twist with acquisitions like Legg Mason or Eaton Vance is that shareholders of closed-end vehicles must sign off on new fund advisory agreements. Corporate mergers count as so-called “change of control” events, as per the Investment Company Act of 1940. That provides an opening for insurgents like Saba to challenge votes, hold up deals, and strong arm boards into change to their liking.
Eaton Vance has set a special shareholder vote on the new agreements for January 7, 2021.
Saba is seeking to block new advisory agreements in proxies it filed for five funds, which together hold more than $1 billion. These are the Eaton Vance Senior Floating-Rate Trust in which Saba recently owned a 7.8 percent position, Eaton Vance Senior Income Trust (a 21 percent stake), Eaton Vance Floating-Rate Income Trust (13.1 percent), Eaton Vance New York Municipal Income Trust (4.9 percent), and the Eaton Vance Floating-Rate Income Plus Fund (22.5 percent).
In its preliminary proxy challenge for the Senior Floating-Rate Trust, for example, Saba complained that the fund traded at a 13.5 percent discount to NAV as of October 1 — far deeper than the fund’s average discount of 9.7 percent over the past three years.
“Saba believes that the market has lost faith in the investment adviser’s ability to add shareholder value due to what Saba views as [the fund’s] excessive discount level,” the hedge fund’s filing states.
Saba wants the trust’s board consider authorizing a tender offer for all the fund’s shares at or near NAV. If more than 50 percent of shares are tendered, Saba says, the fund should either be liquidated or converted to an open-end mutual fund.
That would eliminate the discount and mean a fat, immediate payoff for existing shareholders — Saba included. For a merged Morgan Stanley-Eaton Vance, the options would likely result in lower management fees as an open structure or, in the case of a liquidation, their elimination altogether. Saba repeats the arguments in its proxies for the other funds too.
If Weinstein triumphs in his Eaton Vance campaign, it will add yet another trophy to a decorated year for Saba.
In late 2019, Weinstein began buying credit-default swaps, or insurance against defaults, on high-yield corporate bonds, sensing they were severely underpriced but oblivious to the looming pandemic. He sold swaps on investment-grade bonds, using the premiums Saba received to pay for the high-yield swaps.
When the pandemonium of Covid-19 unfolded in late February, Saba profited mightily as the junk bond market cratered. The Saba Capital Master Fund gained 33 percent in the first two weeks of March alone, according to an investor letter. For the year through October, the fund is up more than 75 percent, according to a person familiar with the matter.
Weinstein declined to comment on the record.
But in a June interview with Institutional Investor, the former Deutsche Bank managing director said the turmoil in closed-end funds this year would make investors more receptive to activist campaigns in general.
“Because these funds handed investors significant losses in 2020, it will change investor behavior in terms of voting,” he said, referring to closed-end funds in general. “This year, we’re going to get even more investors more solidly on our side.”
In closed end fund proxy battles, the baloney often gets sliced mighty thin, with lawyers accusing each other’s clients of bad faith and torturing data to score points with undecided, often unsophisticated, retail investors.
When asked for comment, an Eaton Vance spokesperson referred to the firm’s November 13 preliminary proxy.
In it, Eaton Vance cites Morningstar data that the average discount for a secured senior loan closed-end fund was 13.44 percent as of October 31 — two percentage points beyond the 11.40 percent discount that the Eaton Vance Senior Floating-Rate Trust traded at on the same date.
But that discount may be flattering relative to the fund’s long-term pricing. The 11.40 percent figure had priced in the great merger announcement October 8 and Saba’s regulatory and proxy filings. As of October 1, as Saba’s proxy noted, the Senior Floating-Rate Trust traded at a 13.5 percent discount.
The Eaton Vance proxy also states that all five of the Eaton Vance closed-end funds beat their Morningstar category averages over five years through October 31 based on both price and NAV. Morningstar performance rankings hold enormous weight with funds and investors, who in turn may hold the decisive votes in the Saba merger battle.
History tends to repeat itself in these face-offs.
After Franklin Resources’ merger announcement, for example, Saba built positions in several Legg Mason closed-end funds, including some advised by its Western Asset Management and Royce & Associates subsidiaries.
Saba’s large stakes more or less gave it the power to play hardball.
Legg Mason ultimately agreed to tender for up to 50 percent of several closed-end fund shares, including those of the Royce Global Value Trust, the Western Asset Global High Income Fund, the Western Asset High Income Opportunity Fund, and the Western Asset High Income Fund II, at prices near NAV.
Discounts on the funds shriveled and in one cased flipped to a slight premium, thus handing Saba — and thousands of other investors — millions in profits.
Weinstein and his hedge fund coterie have plied their activist craft for years. Saba got into the closed-end activist game big time beginning in 2015, when many credit funds were spinning their wheels. The firm now has two hedge funds that are dedicated to closed-end fund activism, as well as a modest exchange-traded fund, the Saba Closed-End Funds ETF.
Saba has waged campaigns compelling dozens of closed-end funds to take action to reduce or eliminate their discounts. Targets have included funds advised by bold-faced names like BlackRock, Wells Fargo, and even Weinstein’s former employer Deutsche Bank.
This brand of activism is a rough trade, with targets attempting to trip up Saba board nominations with paperwork, arbitrarily changing election rules, or revising funds’ bylaws to forestall insurgent victories.
The game has nevertheless delivered for Weinstein, who has called himself “an evangelist” for closed-end funds. His Saba ETF has returned 2.41 percent this year and 6.50 percent annualized over three years through November 27 versus 0.85 percent and 5.14 percent annualized for a rival indexed closed-end ETF, per Morningstar.
Those may not be the kind of dazzling returns that Saba’s flagship credit hedge fund is kicking off, but they’re one more place that Boaz Weinstein is beating — or beating up — the competition this year.