Closed End Fund Bancroft Fund Ltd. Sells Top Quality Preferred
By: Tim McPartland,
Closed End Fund (CEF) Bancroft Fund Ltd (NYSE:BCV) has sold a high quality preferred stock with a 5.375% coupon. While the coupon seems very modest the reward equals the risk as this is a low risk issue.
Long term readers will recall that closed end funds are limited in their use of leverage. In the case of preferred stock CEFs must maintain a 200% asset coverage ratio. With BCV this is no problem whatsoever as Moodys has assigned a A1, investment grade rating, to this issue based upon a very strong 500% asset coverage ratio.
Just as a refresher let’s review the legal backing of the “asset coverage” test. The key document regulating investment companies, including closed end funds, is The Investment Company Act of 1940. Section 18 of the “act” spells out the capital structure that must be used for investment companies. It explicitly outlines that preferred stock must have a asset coverage ratio of at least 200%. It goes on to mandate that distributions on securities that are junior to the preferred (such as common shares) can NOT be paid if the asset coverage ratio is not maintained. Additionally the act provides that if an asset coverage ratio of 100% of less occurs for 12 months senior security holders are able to elect a majority of the board of directors. If dividends are not paid on senior securities for 2 years senior security holders may elect at least 2 directors. Of course there are further provisions in the “act”, but the above are key to CEFs being able to garner an investment grade on their preferred shares.
Bancroft Fund Inc. has not had impressive performance over the years (they have been around since 1971), but we aren’t overly concerned with the actual fund performance in this case. We simply care that they maintain a solid asset coverage ratio. Additionally, while the name Bancroft Fund Ltd may not ring a bell with investors, most will certainly recognize closed end fund operator Gabelli who actually operates this fund pursuant to a recent alliance with Bancroft. Given the historical use of preferred stock by Gabelli it is no surprise that BCV would now choose to sell a new issue.
This new issue is cumulative in respect to dividends and pays qualified dividends (meaning dividends are taxed at the lower capital gains tax rate).
This issue began trading on the OTC Grey market on Monday and is trading in the $25-$25.20/share area.