DEFA14A: Herzfeld Caribbean Basin Fund to Shift Investment Strategy to CLO Equity Focus

The Herzfeld Caribbean Basin Fund plans to change its investment strategy to focus on CLO equity, pending regulatory and shareholder approval, due to the stalled opening of U.S.-Cuba trade relations.

Summary

• The Herzfeld Caribbean Basin Fund's Board of Directors has approved a change in the fund's investment strategy.
• The fund will shift its focus to a CLO Equity Strategy, targeting equity and junior debt tranches of collateralized loan obligations.
• The primary investment objective will change to a total return strategy with a secondary objective of generating high current income.
• The board also approved changing the fund's name to Herzfeld Credit Income Fund, Inc. and modifying certain fundamental policies.
• A special meeting of shareholders will be held to approve the changes.
• The new investment management agreement includes a 1.25% management fee and a 10% incentive fee, subject to a 9% hurdle rate.
• The previous management fee was 1.45% of assets under management.
• Thomas J. Herzfeld Advisors, Inc. currently manages approximately $950 million of assets across various investment strategies.
• The fund has reserved the right to use the CUBA ticker symbol and explore investment opportunities in Cuba if circumstances change.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While the change in strategy reflects a setback in Cuban investment prospects, the focus on CLOs is presented as a proactive measure to enhance shareholder value. The new fee structure could be a positive or negative depending on performance.

Positives

• The shift to a CLO strategy is designed to enhance value for shareholders.
• The new strategy may allow the fund to trade at premiums to net asset value.
• The investment manager has experience in credit markets, managing approximately $950 million in assets.
• The new fee structure may be more beneficial depending on the fund's performance.

Negatives

• The change in strategy indicates a lack of progress in U.S.-Cuba trade relations.
• The new fee structure may be more expensive depending on the fund's performance.
• Shareholders must approve the changes, introducing a potential hurdle.

Risks

• The success of the new strategy depends on the performance of CLOs.
• Changes in political, economic, or industry conditions could impact the fund's performance.
• Increased competition could affect the fund's performance.
• The unfavorable resolution of any legal proceedings could impact the fund.
• Terrorist activities, international hostilities, and natural disasters could adversely affect the fund.

Future Outlook

The Fund intends to hold a special meeting of shareholders as soon as practicable to obtain requisite shareholder approvals. The Fund will explore opportunities for investment in Cuba when circumstances warrant.

Management Comments

• Thomas J. Herzfeld stated that the decision to change the investment strategy was not taken lightly and is designed to enhance value for shareholders.
• Cecilia Gondor commented that the board challenged the investment manager to recommend solutions for shareholders due to the persistent discount.

Industry Context

The shift to CLO equity investing reflects a broader trend of funds seeking higher yields in alternative credit markets. CLOs have become an increasingly popular asset class, particularly for closed-end funds seeking to generate income and trade at a premium.

Comparison to Industry Standards

• The management fee of 1.25% is within the typical range for CLO funds.
• The incentive fee of 10% subject to a 9% hurdle rate is a common structure in the CLO market.
• Comparing the fund's performance to other closed-end funds focused on CLO equity will be important to assess the success of the new strategy.
• Funds like Eagle Point Credit Company (ECC) and Oxford Lane Capital Corp. (OCSL) are examples of publicly traded companies that invest in CLO equity and can be used as benchmarks.

Stakeholder Impact

• Shareholders will be impacted by the change in investment strategy and the new fee structure.
• The investment manager will be impacted by the new investment management agreement.
• The fund's performance will impact its ability to attract and retain investors.

Next Steps

• Hold a special meeting of shareholders to approve the changes to the investment strategy and management agreement.
• File the definitive Proxy Statement with the SEC.
• Implement the new CLO Equity Strategy upon shareholder and regulatory approval.

Key Dates

Keywords

CLO Equity Strategy, Herzfeld Caribbean Basin Fund, Investment Strategy, Shareholder Approval, Fee Structure, Cuba, Investments, Fund