HIX: Rights Offering Recap And Future Prospects (NYSE:HIX)

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Author’s note: This analysis was released to CEF/ETF Income Laboratory members as part of the CEF Weekly Roundup on May 23, 2022, with certain numbers updated.

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Franklin Templeton

HIX rights offering results

Western Asset High Income Fund II Inc. (HIX) announced the final results for its rights offering on May 13, 2022.

NEW YORK–(BUSINESS WIRE)–Western Asset High Income Fund II Inc. (NYSE: HIX) (CUSIP: 95766J 110) (“HIX” or the “Fund”) announced the final results of its transferable rights offering (the “Offer”). The Offer expired at 5:00 PM Eastern Time on May 6, 2022 (the “Expiration Date”) and the Rights no longer trade on the New York Stock Exchange (“NYSE”). The final subscription price per share was $5.17, which was equal to 90% of the Fund’s net asset value per share of common stock at the close of trading on the NYSE on May 6, 2022. The Offer will result in the issuance of 6,001,836 shares of common stock. The gross proceeds of the Offer are expected to be approximately $31 million. The shares of common stock subscribed for are expected to be issued on or about May 13, 2022. The Fund will return to subscribing investors the full amount of any excess payments.

We’ve been following HIX’s rights offering in previous Weekly CEF Roundups (see: Quick Notes On HIX Rights Offering). This was a transferable 1-for-3 offering with a subscription formula of 92.5% of the market price of the fund at expiry, with a floor at a -10% discount to NAV. As we expected when the offering was first announced, the floor acted as magnet drawing the discount of the fund towards it as the expiry date neared.

HIX discount or Premium to NAV

YCharts

This caused the fund’s market price to lag its NAV over the course of the rights offering period.

HIX total return price % change and Nav % change

YCharts

Again gives credence to the “sell and rebuy” strategy for CEFs that undergo rights offerings. Now to be clear, the market was overall down over this time period so sidestepping any investment would have been successful. But with HIX, you have the additional negative effects of the rights offering to contend with, further deepening losses.

HIX closed at a -8.54% discount on expiry day (May 6, 2022). This meant that the subscription formula utilized the -10% discount to NAV floor, which gave a subscription price of $5.17, and that gave only a slim -1.5% discount to the market price of $5.25 upon expiry. This narrow discount made the rights offering less attractive and as expected, the offering was undersubscribed with only 6.0 million out of a possible 19.6 million shares issued (around 31% subscription rate).

While this offering might not have gone well for managers, the undersubscription is actually positive for long-term shareholders because it minimizes NAV/share dilution, which I estimate to be on the order of about -$0.05 or a -0.9% hit to NAV. Yet, as I’ve previously mentioned, the managers should still be commended for choosing a formula with a floor to the subscription price rather than a formula without a floor. The latter are inherently more dilutive because it forces one to subscribe or else lose out.

Future prospects

As of June 3, 2022, HIX closed at a discount of -5.45% and a 1-year z-score of -1.3. This discount is wider than its 1-year average of +0.02%, but is comparable to its 3- and 5-year averages of -4.59% and -6.89% respectively. HIX pays a market distribution yield of 10.93% (NAV yield 10.33%), with 93% coverage, although this would be marginally weakened by the slightly dilutive rights offering.

HIX premium/disocunt

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As a high-yield credit fund, HIX is going to be sensitive to the exposure of high-yield bonds in general. However, besides US high-yield bonds, HIX also has a significant exposure to emerging market debt and international bonds (similar to other Western Asset CEFs such as EHI, HYI and HIO).

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Franklin Templeton

As a result, HIX has underperformed US high yield bonds (JNK) on a year-to-date basis due to its international exposure, as geopolitical tensions flared, although it has still fared better than the general emerging market sector (EMB) (also note that unlike the benchmark ETFs shown below, HIX is leveraged which magnifies downturns).

HIX, JNK, and EMB total return NAV % change
Data by YCharts

Therefore, those who are bullish on US high-yield bonds as well as emerging market bonds could consider HIX. On the other hand, those who wish to avoid international exposure would not likely want to consider HIX.

Personally, at this valuation, I would rate HIX as a hold. An alternative high-yield CEF which our Tactical Income-100 portfolio currently invests in is the First Trust High Yield Opportunities 2027 Term Fund (FTHY).

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Cumulative total return of income generator portfolio

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