DEFA14A: Herzfeld Caribbean Basin Fund Proposes Shift to CLO Equity Strategy Amidst Shifting Geopolitical Landscape

Herzfeld Caribbean Basin Fund is proposing a significant shift in its investment strategy, moving away from its focus on the Caribbean Basin and potential Cuban investments to concentrate on CLO equity, driven by geopolitical shifts and persistent discount to NAV.

Summary

• The Herzfeld Caribbean Basin Fund is considering a major strategic shift due to the unlikelihood of improved U.S.-Cuba trade relations in the foreseeable future.
• The Fund's board is recommending a change to a CLO Equity Strategy, focusing on equity and junior debt tranches of collateralized loan obligations.
• The primary investment objective will shift to total return with a secondary objective of high current income.
• The board believes this change will help narrow the persistent discount to NAV and enhance shareholder value.
• The Fund's name will change to Herzfeld Credit Income Fund, Inc. (or similar), and the NASDAQ ticker symbol will also be updated.
• Shareholders will vote on the proposed changes at a special meeting.
• The current Managed Distribution Policy (MDP), providing a 15% annual distribution rate based on NAV, will remain in effect until June 30, 2025.
• The investment management agreement with Herzfeld Advisors will be amended, changing the fee structure to 1.25% of assets under management plus a 10% incentive fee above a 9% hurdle rate.
• The Fund's NAV increased by 6.53% and share price increased by 9.26% during the six-month period ended December 31, 2024, adjusted for distributions.
• However, the discount to NAV widened from -22.86% to -23.94% during the same period.
• The fund is reallocating its portfolio to more U.S.-centric companies in the Caribbean Basin and increasing its cash allocation due to market volatility and negative outlook for the region.

Sentiment

Score: 5

Explanation: The document presents a mixed sentiment. While the fund is proactively addressing challenges and seeking new opportunities, the shift in strategy and negative outlook for the Caribbean Basin introduce uncertainty. The positive NAV and share price growth are overshadowed by the widening discount to NAV.

Positives

• The proposed shift to a CLO Equity Strategy aims to address the persistent discount to NAV and enhance shareholder value.
• The current Managed Distribution Policy (MDP) will remain in effect until June 30, 2025, providing a fixed minimum rate of distribution.
• The board believes the Fund could trade at premiums under the new investment strategy, similar to other CLO equity funds.
• The Fund's NAV and share price showed positive growth during the six-month period ended December 31, 2024.
• The fund is reallocating its portfolio to more U.S.-centric companies in the Caribbean Basin and increasing its cash allocation due to market volatility and negative outlook for the region.

Negatives

• The Fund is abandoning its original investment thesis focused on the Caribbean Basin and potential Cuban investments.
• The discount to NAV widened during the six-month period ended December 31, 2024, despite positive NAV and share price growth.
• The outlook for the Caribbean Basin region is described as decidedly negative due to potential U.S. policies.
• The largest detractor over the period was Grupo Elektra SAB de CV (ELEKTRA*) which declined 71.12% due to litigation with Astor Asset Management.

Risks

• The success of the new CLO Equity Strategy is subject to market conditions and the performance of CLOs.
• The proposed changes require shareholder approval, and there is no guarantee that it will be obtained.
• The negative outlook for the Caribbean Basin region could impact the performance of remaining investments in the area.
• Potential U.S. policies, including increased tariffs and immigration restrictions, pose a risk to the economies of Mexico, the Caribbean, and Central American countries.
• The change in investment strategy may not appeal to all existing shareholders, potentially leading to outflows.

Future Outlook

The Fund anticipates a special shareholder meeting to approve the strategy changes and amended investment management agreement. The outlook for the Caribbean Basin is negative due to potential U.S. policies. The Fund is reallocating its portfolio to more U.S.-centric companies and increasing its cash allocation.

Management Comments

• The Board challenged Herzfeld Advisors to present options for Board consideration with the primary goal of determining a strategy to narrow the discount significantly and enhance value to all shareholders of the Fund.
• The Board determined that it would be in the best interests of the Fund's shareholders to set aside the Funds current investment strategy and redirect the Fund to focus on a CLO Equity Strategy.
• The Board has kept in place the current Managed Distribution Policy (MDP) through June 30, 2025, which is designed to provide shareholders with a constant, but not guaranteed, fixed minimum rate of distribution.
• Herzfeld Advisors continues to look forward to the day when the U.S. and Cuban governments move beyond the current stalemate.
• The Advisor has reserved rights to use the CUBA ticker on NASDAQ and, should circumstances warrant, will seek to explore future investment in Cuba when that day comes.

Industry Context

The shift to a CLO Equity Strategy reflects a broader trend of closed-end funds seeking alternative investment strategies to enhance returns and address persistent discounts to NAV. The document mentions that the board believes the Fund could trade at premiums under the new investment strategy, similar to the share prices of certain other CLO equity funds in the market today.

Comparison to Industry Standards

• The document mentions that the board believes the Fund could trade at premiums under the new investment strategy, similar to the share prices of certain other CLO equity funds in the market today.
• The proposed amended management fee comprises a management fee of 1.25% based upon assets under management and an incentive fee based upon the income earned by the Fund of 10%, subject to a hurdle rate of 9%, which is consistent with fee structures of existing registered closed-end funds engaged in CLO strategies.

Management Changes

Legal Proceedings

• Controlling shareholder, Ricardo Salinas, is embroiled in litigation with Astor Asset Management which resulted in the halting of Elektra stock.

Stakeholder Impact

• Shareholders will be impacted by the proposed change in investment strategy and the potential for enhanced or diminished returns.
• The Fund's investment manager, Herzfeld Advisors, will be impacted by the amended investment management agreement and the shift in investment focus.
• Companies in the Caribbean Basin region may be impacted by the Fund's reallocation of its portfolio to more U.S.-centric companies.
• The Fund's employees and directors will be involved in implementing the proposed changes and managing the new investment strategy.

Next Steps

• The Fund intends to hold a special meeting of shareholders to obtain approval for the proposed changes to the investment strategy and the amended investment management agreement.
• The Fund will file a definitive Proxy Statement with the SEC providing additional information about the proposed changes.
• The Board will evaluate whether to extend the Managed Distribution Policy (MDP) beyond June 30, 2025.

Key Dates

Keywords

CLO Equity Strategy, Herzfeld Caribbean Basin Fund, Investment Strategy, Cuba, Discount to NAV, Managed Distribution Policy, Caribbean Basin, Shareholder Value, Investment Management Agreement, Tender Offer