Stockholders of Highland Income Fund Urged to Vote Against Conversion to Holding Company
10 Agosto 2021 - 4:48PM
Business Wire
The Coalition of Concerned Stockholders of Highland Income Fund
(NYSE: HFRO) today issued the following letter urging all
stockholders to vote against the proposed conversion to a holding
company.
Dear Fellow Stockholder of
Highland Income Fund (HFRO):
After the close of business on June 14, 2021, HFRO announced a
plan to change from a registered investment company to a
diversified holding company. The next day HFRO’s stock price fell
7.65 % from $11.89 to $10.98 (even though the net asset value (NAV)
was only down a penny) and the discount to NAV widened from 13.97%
to 20.49%. On June 28 the stock price hit a low of $9.92 and the
discount reached almost 28%. I think there are good reasons for
investors’ pessimism and consequently good reasons to vote down
this ill-advised proposal at the stockholder meeting on August
20.
- HFRO’s current structure as a regulated investment company
provides important protections for stockholders. Among the many
protections that will be lost if the proposed conversion is
implemented are: (1) a prohibition on using excessive leverage, (2)
a prohibition on secondary offerings that dilute existing
stockholders, (3) a prohibition on self-dealing (joint)
transactions, (4) the right of stockholders to fire the investment
advisor at any time with no penalty, and (5) a requirement that the
at least 40% of the trustees must be independent of
management.
- James Dondero is the “face” of both HFRO and NexPoint Strategic
Opportunities Fund (NHF), another closed-end fund. Moreover, all of
the trustees of HFRO are also trustees of NHF. One year ago, NHF’s
trustees proposed deregistering that fund as an investment company,
a proposal they said was intended to increase stockholder value and
address NHF’s trading discount. NHF’s stockholders voted to approve
the proposal but the results have been very disappointing. NHF
currently trades at a discount of almost 40% to its NAV.
- Mr. Dondero, the proposed President and CEO of HFRO
post-conversion, has a long history contentious litigation. On
October 16, 2019, Highland Capital Management, L.P. (“HCMLP”), an
investment advisor controlled by Mr. Dondero, filed for Chapter 11
bankruptcy protection. The judge in that case ordered him to stay
away from HCMLP’s business during the bankruptcy. On June 7, 2021,
the judge found Mr. Dondero in contempt for knowingly violating
that court order. The judge also found that he improperly disposed
of a company-issued cell phone that may have contained evidence.
And just a few days ago, the judge again found Mr. Dondero in
contempt of court, this time for violating an order barring him
from suing HCLMP’s replacement CEO without the court’s
permission.
Rather than voting for a radical change in HFRO’s business which
may well result in a lower stock price, I believe there are actions
that can be taken that are more likely to enhance stockholder value
including the following:
- I believe Mr. Dondero’s association with HFRO is the primary
reason its shares trade at a large discount to NAV. While
litigation is sometimes unavoidable, Mr. Dondero’s frequent and
aggressive use of litigation must be distracting. Therefore, HFRO’s
current investment advisory agreement with his firm should be
terminated and an advisor that will focus on enhancing stockholder
value should be hired.
- Mr. Dondero has caused a significant percentage of HFRO’s
portfolio to consist illiquid hard-to-value assets. Investors tend
to assign a large discount to the “fair value” of such assets.
Consequently, the new investment advisor should actively seek to
monetize HFRO’s illiquid investments and redeploy the capital into
liquid income producing securities.
- Excess cash from asset sales should also be used to
aggressively repurchase HFRO’s common stock when it trades at a
wide discount from its NAV.
As Shakespeare famously wrote in Julius
Caesar, “The fault, dear Brutus, is not in our stars / But
in ourselves, that we are underlings.” In short, there is nothing
wrong with HFRO that cannot be fixed by getting rid of Mr. Dondero.
If stockholders vote to convert HFRO to a holding company led by
Mr. Dondero, they will likely regret it just like many stockholders
of NHF probably regret voting to deregister that fund. To send a
message to the board that Mr. Dondero must go, I urge you to vote
against the proposal to convert HFRO from a registered closed-end
fund to a holding company.
IF YOU HAVE ALREADY RETURNED YOUR PROXY CARD AND VOTED FOR
CONVERSION, YOU CAN CHANGE YOUR VOTE AT ANY TIME BEFORE THE
MEETING. IF YOU HAVE ANY QUESTIONS ABOUT HOW TO VOTE YOUR PROXY,
PLEASE CALL INVESTORCOM AT 1-877-972-0090.
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Investor & Media contacts:
Phillip Goldstein pgoldstein@bulldoginvestors.com (914)
260-8248
John Grau InvestorCom (203) 972-9300 info@investor-com.com
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