SCHEDULE: Saba Capital Pushes BNY Mellon Funds for Merger

Saba Capital Management, holding over 10% of BNY Mellon Strategic Municipal Bond Fund, urges a merger into an open-end structure to address persistent NAV discounts and high expense ratios.

Summary

• Saba Capital Management, L.P., along with Saba Capital Management GP, LLC and Boaz R. Weinstein, collectively own 5,179,441 Common Shares of BNY Mellon Strategic Municipal Bond Fund, Inc., representing 10.31% of the outstanding shares.
• Saba Capital sent a letter to the Issuer's Chairman on December 17, 2025, expressing concerns about the long-term viability of the fund and two other BNY Mellon municipal bond funds (DMB and LEO).
• The activist investor intends to nominate trustee candidates at the Issuer's 2026 annual meeting of shareholders.
• Saba Capital encourages the Issuer's board to proactively consider a value-enhancing merger, specifically suggesting reorganization into the BNY Mellon AMT-Free Municipal Bond Fund (DMUAX).
• The filing highlights shareholder dissatisfaction, evidenced by a proposal to convert DSM to an open-end structure nearly passing with over 45% of votes, and a proposal to declassify DMB's board passing.
• The funds consistently trade at steep discounts to Net Asset Value (NAV), averaging around -10% over the past year.
• Expense ratios for the funds (0.97% to 1.68%) are significantly higher than comparable open-ended municipal bond funds, such as DMUAX (0.70%).
• A reorganization into DMUAX is projected to deliver nearly 1% in annual cost savings for DMB shareholders alone.
• Saba Capital acquired 27,875 shares at $5.90 on November 28, 2025, and distributed 1,025 shares in-kind for no consideration on the same date.
• Approximately $28,937,208 was paid to acquire the reported Common Shares, funded by investor subscriptions, capital appreciation, and margin account borrowings.

Sentiment

Score: 3

Explanation: The filing indicates significant shareholder dissatisfaction and underperformance of the funds, with persistent NAV discounts and high expense ratios. While Saba Capital's activism aims to improve value, the current situation for the issuer is negative, suggesting a low sentiment score for the issuer's current state.

Positives

• Saba Capital's proposal for reorganization into DMUAX could lead to significant cost savings for shareholders, estimated at nearly 1% annually for DMB shareholders.
• A potential merger could address the persistent steep discounts to NAV, which have averaged around -10% over the past year.
• The proposed changes aim to enhance shareholder value and provide a clearer path forward for the funds.
• Saba Capital's intent to nominate new directors could increase shareholder representation and influence on the board.

Negatives

• The BNY Mellon Strategic Municipal Bond Fund (and related funds DMB, LEO) persistently trade at steep discounts to NAV, averaging around -10% over the past year.
• The funds' expense ratios (0.97% to 1.68%) are materially higher than similar open-ended municipal bond funds, indicating inefficiency.
• Shareholders are reportedly dissatisfied with the current status quo, as evidenced by recent voting outcomes.
• The current structure is described as trapping shareholders due to the persistent NAV discounts.

Risks

• Saba Capital explicitly expressed concerns regarding the long-term viability of the Issuer and related funds.
• Persistent steep discounts to NAV and high expense ratios are leading to shareholder dissatisfaction, potentially impacting fund stability and management's ability to operate effectively.
• The intent to nominate trustee candidates and push for a merger creates uncertainty and potential for a proxy fight, which can incur significant legal and administrative expenses.
• If the board does not proactively address the persistent NAV discounts and high expense ratios, shareholder value could continue to erode.
• A contested director nomination or a prolonged negotiation over a merger could lead to unnecessary legal and administrative expenses for the Issuer.

Future Outlook

Saba Capital intends to nominate trustee candidates at the Issuer's 2026 annual meeting of shareholders and encourages the board to proactively consider a value-enhancing merger, specifically into the BNY Mellon AMT-Free Municipal Bond Fund (DMUAX), to address persistent NAV discounts and high expense ratios. They believe this conversion would be the easiest path forward, benefiting all parties and avoiding unnecessary legal and administrative expenses.

Management Comments

• "We are reaching out on behalf of Saba Capital and, in our view, all shareholders to express serious concerns regarding the long-term viability of the following funds."
• "With stakes of this size, we believe we have a responsibility to advocate for changes that will benefit all shareholders by using our platform to amplify their concerns to you."
• "For months, it has been evident to us that the Funds' shareholders are dissatisfied with the current status quo and the recent shareholders votes only further underscored this."
• "From our vantage point, the path forward here is clear and simple: if BNY Mellon reorganized the Funds into DMUAX, it would deliver a meaningful and immediate cost savings to shareholders in each fund."
• "For these reasons, we intend to nominate new directors at the Funds' upcoming general meeting so that shareholders can finally regain their voice."
• "We want to be clear that we believe the conversion into DMUAX would be the easiest path forward. Not only would it be in the best interest of all parties including shareholders and BNY Mellon but it would also enable unnecessary legal and administrative expenses to be avoided."
• "Pursuing a conversion of each fund is a prudent fiduciary step to maximize value for all investors."

Industry Context

This filing highlights a common issue in the closed-end fund industry where funds trade at significant discounts to their Net Asset Value (NAV) and may have higher expense ratios compared to their open-ended counterparts. Activist investors like Saba Capital frequently target such funds to push for corporate actions, such as conversions to open-end structures or mergers, to unlock shareholder value by narrowing the NAV discount and reducing fees. The reference to the successful reorganization of DMF into DMUAX earlier in the year suggests a precedent within BNY Mellon's own fund family for such actions, indicating a broader trend towards optimizing fund structures for shareholder benefit in the municipal bond sector.

Comparison to Industry Standards

• The BNY Mellon Strategic Municipal Bond Fund (DSM), BNY Mellon Municipal Bond Infrastructure Fund (DMB), and BNY Mellon Strategic Municipals (LEO) have traded at average discounts of around -10% to NAV over the past year, which is a significant underperformance compared to a fund trading at or near NAV.
• The expense ratios for DSM, DMB, and LEO, ranging from 0.97% to 1.68%, are materially higher than the 0.70% charged by BNY Mellon's own AMT-Free Municipal Bond Fund (DMUAX), indicating that the current funds are less cost-efficient than a comparable open-ended offering from the same manager.
• The successful reorganization of DMF into DMUAX, which resulted in cost reductions and discount compression, serves as an internal benchmark demonstrating that the proposed action is feasible and has a positive precedent within BNY Mellon's operations.

Corporate Governance

Stakeholder Impact

• Shareholders: Potential for significant value enhancement through cost savings and discount compression if Saba Capital's proposed merger or director nominations are successful. Currently, shareholders are "trapped" by persistent NAV discounts and high expense ratios.
• BNY Mellon (as fund manager): Potential for increased scrutiny and pressure from an activist investor. A successful merger could streamline operations and potentially lead to a more competitive product (DMUAX), but a proxy fight could be costly and reputationally damaging.
• Employees/Management of the Funds: Potential for changes in roles or responsibilities if funds are merged or converted.

Next Steps

• Saba Capital intends to nominate trustee candidates at the Issuer's 2026 annual meeting of shareholders.
• Saba Capital encourages the Issuer's board of trustees to proactively consider a value-enhancing merger, specifically into the BNY Mellon AMT-Free Municipal Bond Fund (DMUAX).
• Further discussions between Saba Capital and the Issuer's board are anticipated.

Key Dates

Recommendation

The filing reveals significant underperformance and shareholder dissatisfaction with the BNY Mellon Strategic Municipal Bond Fund and related funds, characterized by persistent steep discounts to NAV (averaging -10%) and materially higher expense ratios compared to similar open-ended alternatives. While an activist investor is pushing for value-enhancing changes, the current state of the fund indicates poor value for existing shareholders. The expressed concerns about "long-term viability" and the need for a "value-enhancing merger" suggest that the current structure is detrimental. Investors should consider selling to avoid further erosion of value or to reallocate to more efficient municipal bond funds, even with the potential for future improvements from activist pressure, as the immediate outlook is negative.

Keywords

Saba Capital, BNY Mellon, Strategic Municipal Bond Fund, DSM, Activist Investor, Schedule 13D, Shareholder Activism, Closed-End Fund, NAV Discount, Expense Ratio, Fund Merger, Trustee Nomination, Corporate Governance, Municipal Bonds, Investment Management