SCHEDULE: Saba Capital Pushes BNY Mellon Strategic Municipals for Merger

Activist investor Saba Capital Management urges BNY Mellon Strategic Municipals to merge into an open-end fund, citing persistent NAV discounts and high expense ratios.

Summary

• Saba Capital Management, L.P. and affiliates beneficially own 6,076,820 common shares, representing 9.76% of BNY Mellon Strategic Municipals, Inc. (LEO).
• Saba Capital has expressed serious concerns regarding the long-term viability of LEO, BNY Mellon Municipal Bond Infrastructure Fund (DMB), and BNY Mellon Strategic Municipal Bond Fund (DSM).
• The firm intends to nominate trustee candidates at the Funds' 2026 annual meeting of shareholders.
• Saba Capital encourages the Issuer's board to proactively consider a value-enhancing merger, specifically into BNY Mellon's AMT-Free Municipal Bond Fund (DMUAX).
• Shareholders are dissatisfied, as evidenced by recent votes where a proposal to convert DSM to an open-end structure nearly passed (over 45% in favor) and a proposal to declassify DMB's board passed.
• The Funds persistently trade at steep discounts to Net Asset Value (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 like DMUAX (0.70%).
• A reorganization into DMUAX is projected to deliver nearly 1% annual cost savings for DMB shareholders.
• Saba Capital paid approximately $35,993,261 to acquire the reported common shares.

Sentiment

Score: 3

Explanation: The filing highlights significant underperformance and shareholder dissatisfaction with the current structure and costs of the funds. While Saba Capital proposes a solution, the underlying issues represent a negative situation for existing shareholders.

Positives

• Saba Capital's proposal for a merger into an open-end fund (DMUAX) could lead to meaningful and immediate cost savings for shareholders, potentially nearly 1% annually for DMB shareholders.
• A merger could also lead to discount compression, as observed in the prior reorganization of DMF into DMUAX.
• The proposed actions aim to maximize value for all investors and avoid unnecessary legal and administrative expenses.

Negatives

• The Funds (DMB, DSM, LEO) persistently trade at steep discounts to Net Asset Value (NAV), averaging around -10% over the past year.
• The Funds' expense ratios, ranging from 0.97% to 1.68%, are materially higher than similar open-ended municipal bond funds offered by BNY Mellon, such as DMUAX (0.70%).
• Shareholders are reportedly dissatisfied with the current status quo, as indicated by recent shareholder votes.
• Saba Capital expresses concerns regarding the long-term viability of the Funds.

Risks

• Long-term viability concerns for BNY Mellon Strategic Municipals, Inc., BNY Mellon Municipal Bond Infrastructure Fund, and BNY Mellon Strategic Municipal Bond Fund.
• Persistent trading at steep discounts to NAV, indicating potential undervaluation or lack of investor confidence.
• High expense ratios compared to industry alternatives, potentially eroding shareholder returns.
• Potential for a proxy contest if the board does not agree to Saba Capital's proposals, leading to legal and administrative expenses.

Future Outlook

Saba Capital intends to nominate new directors at the Funds' upcoming 2026 general meeting of shareholders to advocate for changes. They encourage the board to proactively consider a value-enhancing merger of the Funds into BNY Mellon's AMT-Free Municipal Bond Fund (DMUAX), which they believe would lead to cost savings and discount compression.

Management Comments

• "For months, it has been evident to us that the Funds' shareholders are dissatisfied with the current status quo."
• "Shareholders in each of the Funds remain trapped because the Funds persistently trade at steep discounts to NAV."
• "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."
• "We intend to nominate new directors at the Funds' upcoming general meeting so that shareholders can finally regain their voice."
• "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 reflects a common strategy in closed-end fund activism, where investors target funds trading at significant discounts to their Net Asset Value (NAV). Activists often push for conversions to open-end structures, liquidations, or mergers to unlock shareholder value by eliminating the discount and reducing high expense ratios. The reference to the successful reorganization of DMF into DMUAX earlier this year highlights a precedent within BNY Mellon's own fund family, suggesting a viable path for the targeted funds. This trend is driven by increasing scrutiny on fund performance and fees, especially in a competitive market for municipal bond investments.

Comparison to Industry Standards

• The targeted funds (DMB, DSM, LEO) trade at an average discount of approximately -10% to NAV, which is a significant underperformance compared to an ideal scenario where closed-end funds trade closer to or at NAV.
• The expense ratios of 0.97% to 1.68% for DMB, DSM, and LEO are materially higher than BNY Mellon's own open-ended AMT-Free Municipal Bond Fund (DMUAX), which charges 0.70%. This suggests the targeted funds are not competitive on fees within their own sponsor's offerings, let alone broader industry benchmarks for low-cost municipal bond funds.
• The successful reorganization of DMF into DMUAX, resulting in cost reductions and discount compression, serves as a direct internal benchmark demonstrating the potential for improved shareholder value through the proposed strategy.

Corporate Governance

Stakeholder Impact

• Shareholders: Potential for significant value creation through cost savings (nearly 1% annually for DMB shareholders) and discount compression if the proposed merger occurs. Risk of continued underperformance and dissatisfaction if no action is taken.
• BNY Mellon (as fund sponsor/adviser): Potential for reduced management fees if funds merge into a lower-cost open-end structure, but also potential for increased assets under management in the open-end fund. Risk of proxy contest and reputational damage if shareholder concerns are not addressed.
• Management/Trustees of the Funds: Pressure to address shareholder concerns and potentially make significant strategic decisions regarding the funds' future.

Next Steps

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

Key Dates

Recommendation

The filing highlights significant issues with the BNY Mellon Strategic Municipals funds, including persistent discounts to NAV and high expense ratios, which are detrimental to shareholder value. Saba Capital's activist stance and proposal for a merger into a lower-cost open-end fund (DMUAX) present a clear path to unlock value and address these issues. While the current situation is negative, the activist pressure and the precedent of a successful similar reorganization (DMF into DMUAX) suggest a potential positive catalyst. Investors currently holding the stock should hold to see how management responds to Saba Capital's demands, as a successful outcome could lead to significant upside. New investors might consider a speculative buy based on the activist catalyst, but a 'hold' is more prudent given the current underperformance until a concrete plan is announced.

Keywords

Saba Capital, BNY Mellon Strategic Municipals, LEO, DMB, DSM, Closed-End Fund, Activist Investor, Shareholder Activism, NAV Discount, Expense Ratio, Merger, Open-End Fund, Trustee Nomination, Corporate Governance, Municipal Bonds