Note: A modified version of this article was released to CEF/ETF Income Laboratory members on June 28, 2020, and data are from that date. Please check latest data before investing.

BlackRock announced a slate of muni bond CEF reorganizations last month, due to be completed “in or before the first quarter of 2021” subject to shareholder approval. Investors who already own any of these muni funds could consider swapping to the fund with the widest discount out of each category because the mergers will be on a NAV-to-NAV basis, allowing them to potentially boost their returns in an amount approximately equivalent to the discount differential.

Whether or not that fund is the acquiring fund or the funds being acquired is immaterial. However, the risk is that the underlying NAV returns for the funds will diverge between now and the merger date. As we’ll see below, the risk of this varies for the different mergers. More advanced traders could consider arbitraging the difference by shorting the overvalued fund while buying the undervalued fund of each set of mergers.

We’ll discuss each set of mergers individually below.

New York munis

June 16, 2020 | BlackRock Announces Board Approval of Municipal Closed-End Fund Reorganizations. BlackRock Advisors, LLC announced today that the Boards of Trustees of BlackRock New York Municipal Income Trust II (BFY), BlackRock New York Municipal Income Quality Trust (BSE) and BlackRock New York Municipal Income Trust (BNY) (collectively, the “Funds”) have approved the reorganizations of each of BFY and BSE with and into BNY, with BNY continuing as the surviving Fund (together, the “Reorganizations”). It is currently expected that the Reorganizations will be completed in or before the first quarter of 2021, subject to the requisite approvals by each Fund’s shareholders, the refinancing of BNY’s preferred shares and the satisfaction of customary closing conditions.

How To Consistency Beat the Market With Over a 90% Success Rate

Whether the market is up, down, or sideways, the Option Strategies Insider membership gives traders the power to consistently beat any market. Spend less than one hour a week and do the same.

Just click the link below to see our full presentation on exactly how we do it.

CLICK HERE TO JOIN OUR FREE WEBINAR
Fund Discount
(BNY) (acquiring) -8.59%
(BFY) -9.90%
(BSE) -10.93%

With the merger of three New York muni funds, the risk of swapping is relatively low given the similarity of their portfolios. Hence, holders of BNY and BFY should consider swapping to BSE.

State/General

June 16, 2020 | BlackRock Announces Board Approval of Municipal Closed-End Fund Reorganizations. BlackRock Advisors, LLC announced today that the Boards of Directors or Trustees, as applicable, of BlackRock Maryland Municipal Bond Trust (BZM), BlackRock Massachusetts Tax-Exempt Trust (MHE), BlackRock MuniYield Arizona Fund, Inc. (MZA), BlackRock MuniYield Investment Fund (MYF), BlackRock MuniEnhanced Fund, Inc. (MEN) and BlackRock MuniYield Quality Fund, Inc. (MQY) (collectively, the “Funds”) have approved the reorganizations of each of BZM, MHE, MZA, MYF and MEN with and into MQY, with MQY continuing as the surviving Fund (collectively, the “Reorganizations”). It is currently expected that the Reorganizations will be completed in or before the first quarter of 2021, subject to the requisite approvals by each Fund’s shareholders and the satisfaction of customary closing conditions.

Fund Discount
(MQY) (acquiring, general) -5.64%
(BZM) (Maryland) -8.88%
(MHE) (Massachusetts) -7.04%
(MZA) (Arizona) -3.03%
(MYF) (general) -4.88%
(MEN) (general) -8.36%

Here we have a more interesting merger situation because three of the funds are state-specific funds. It appears unfortunate that investors will no longer have the option to invest in Maryland, Massachusetts, or Arizona muni funds run by BlackRock. As the chart below shows, there has also been some divergence in the NAV performances of these funds, so swapping is not without risk. Still, it does look like MEN represents the best fund at this moment with its -8.36% discount and NAV performance that is the second-best out of the group.

General

June 16, 2020 | BlackRock Announces Board Approval of Municipal Closed-End Fund Reorganizations. BlackRock Advisors, LLC announced today that the Boards of Trustees of The BlackRock Strategic Municipal Trust (BSD), BlackRock MuniYield Investment Quality Fund (MFT), BlackRock Municipal Income Investment Trust (BBF) and BlackRock Municipal Income Trust II (BLE) (collectively, the “Funds”) have approved the reorganizations of each of BSD, MFT and BBF with and into BLE, with BLE continuing as the surviving Fund (collectively, the “Reorganizations”). It is currently expected that the Reorganizations will be completed in or before the first quarter of 2021, subject to the requisite approvals by each Fund’s shareholders, the refinancing of BBF’s preferred shares and the satisfaction of customary closing conditions.

Fund Discount
(BLE) (acquiring) +1.17%
(BSD) -6.42%
(MFT) -6.82%
(BBF) -6.94%

Given that these four CEFs are all general muni funds and have quite similar NAV performances, swapping from BLE to any of the other three funds which have similar discounts appears to be a no-brainer given the large spread in valuations. Current owners of BLE should take note.

General

June 16, 2020 | BlackRock Announces Board Approval of Municipal Closed-End Fund Reorganizations. BlackRock Advisors, LLC announced today that the Boards of Directors or Trustees, as applicable, of BlackRock Municipal Income Investment Quality Trust (BAF), BlackRock Municipal Bond Trust (BBK), BlackRock MuniHoldings Fund II, Inc. (MUH), BlackRock MuniHoldings Quality Fund, Inc. (MUS) and BlackRock MuniHoldings Fund, Inc. (MHD) (collectively, the “Funds”) have approved the reorganizations of each of BAF, BBK, MUH and MUS with and into MHD, with MHD continuing as the surviving Fund (collectively, the “Reorganizations”). It is currently expected that the Reorganizations will be completed in or before the first quarter of 2021, subject to the requisite approvals by each Fund’s shareholders and the satisfaction of customary closing conditions.

Fund Discount
(MHD) (acquiring) -9.63%
(BAF) -9.76%
(BBK) -5.88%
(MUH) -6.95%
(MUS) -10.87%

Like above, these five funds are all general muni funds, but the performance spread here is a bit wider. The two top-performing funds, BBK and MUH, are also the funds with the narrowest discounts. Still, swapping from these two funds into MHD, which is around 3-4% cheaper but only slightly worse in performance, could be worthwhile.

Summary

Arbitrage opportunities are available when closed-end funds undergo mergers. The astute investor could potentially boost their returns by several percent (which could be the equivalent of months of distributions from muni funds!) by swapping to the fund with the widest discount out of each merger group.

The main risks of this strategy are:

  1. The underlying NAV performances of the funds diverge, such that the fund that is purchased performs more poorly than the fund that is sold. The risk of this is minimized if the funds have similar historical NAV profiles and invest in the same sector.
  2. The mergers are not approved by shareholders, so that the driving force for the arbitrage disappears.
  3. Tax issues are not considered.

Profitable CEF and ETF income and arbitrage ideas

https://static.seekingalpha.com/uploads/2019/5/2/27546953-15567808556447084.png At the CEF/ETF Income Laboratory, we manage market-beating closed-end fund (CEF) and exchange-traded fund (ETF) portfolios targeting safe and reliable ~8% yields to make income investing easy for you. Check out what our members have to say about our service.

To see all that our exclusive membership has to offer, sign up for a free trial by clicking on the button below!



Disclosure: I am/we are long the portfolios. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.