Loading, Please Wait...

CST: 07/06/2020 03:54:57   

Dolphin Pursues Restructuring or Prompt Liquidation of First Trust High Income Long/Short Fund (NYSE TICKER SYMBOL: FSD)

262 Days ago

GREENWICH, Conn., Sept. 18, 2019 (GLOBE NEWSWIRE) -- Dolphin Limited Partnership I, L.P. and other entities, long-term shareholders of First Trust High Income Long/Short Fund (NYSE: FSD), which hold over 450,000 shares of FSD or approximately $6.7 million, announced today that they sent a letter to the Board of Trustees of FSD to reiterate recommendations they had made to FSD nearly a year ago. Starting in September 2018, Dolphin had approximately five months of continuous communications with FSD regarding proposals to close the then approximately 13% discount of FSD’s market price to its net asset value (which discount has persisted), including communications regarding a proposal intended to benefit all shareholders and to be voted on at FSD’s April 8, 2019 Shareholder’s Meeting (the “Original Proposal”). FSD, however, went to extraordinary, and likely costly, lengths to exclude the Original Proposal from the 2019 Annual Meeting. Dolphin has therefore reiterated its recommendations for consideration by the Board of Trustees or to promptly liquidate the fund and return the net asset value to its shareholders in the attached letter.

About Dolphin Limited Partnership I, L.P.

Dolphin Limited Partnership I, L.P. is a Delaware limited partnership formed in or about 1995. Dolphin and its affiliates have a history of working to generate value on behalf of all shareholders.


c/o Scott R. Wilson, Esq.
Miles & Stockbridge P.C.


September 3, 2019
Revised September 13, 2019


The Board of Trustees
First Trust High Income Long/Short Fund
120 East Liberty Drive, Suite 400
Wheaton, Illinois 60187

RE:      Request to Restructure or Liquidate First Trust High Income Long/Short Fund (REVISED)


As you are aware, Dolphin Limited Partnership I, L.P., a Delaware limited partnership (“Dolphin”), is a sizeable long-term shareholder of First Trust High Income Long/Short Fund (NYSE Ticker Symbol: FSD or the “Fund”), a diversified closed-end investment company established as a Massachusetts business trust on June 18, 2010. Dolphin, together with other entities, beneficially own more than 450,000 shares or $6.7 million of FSD (as of August 30, 2019). Dolphin now resubmits a revised proposal, which it originally had made to FSD in December 2018 (the “Original Proposal”), designed to close the persistent and sizable market discount to net asset value (“NAV”) or, in the alternative, nearly a year later, promptly liquidate the Fund. After providing the Board of Trustees and FSD with a 10-day opportunity to correct any factual inaccuracies believed to be contained in this letter, Dolphin intends to disseminate this letter to shareholders by press release.


Dolphin believes that the Fund’s composition and approach impede closure of the approximate 13% market discount to NAV (as of August 30, 2019), cause NAV depletion and, with its perpetual structure and fixed coupon holdings, unnecessarily expose the Fund to widening credit spreads. Dolphin’s Original Proposal was that FSD establish a date on which it is required to liquidate (a “Target Term”) within three to five years, and distribute a defined per share value on such date (“Target Term NAV”). Alternatively, nearly a year after its Original Proposal, the Board of Trustees should liquidate the Fund and return the NAV to shareholders.

Dolphin maintains that the Fund’s market discount to NAV remains wide because:

  • The Fund holds predominantly fixed coupon securities while there has been a general rise in interest rates since 2016.
  • FSD is a perpetual fund. Comparatively, funds with target terms similar to the Target Term contained in the Original Proposal nearly a year earlier, including Blackstone/GSO Senior Floating Rate Term Fund (BSL), First Trust Senior Floating Rate 2022 Target Term Fund (FIV), Nuveen Credit Opportunities 2022 Target Term Fund (JCO), Eaton Vance Floating-Rate 2022 Target Term Trust (EFL), Eaton Vance High Income 2021 Target Term Trust (EHT), and Nuveen High Income November 2021 Target Term Fund (JHB), trade and have been trading significantly closer to NAV:
  Market (Discount)/Premium to NAV (as of August 30, 2019)
(Discount)/Premium (13.1 )% (1.2 )% (4.9 )% 0.4 % (2.3 )% (1.3 )% (0.2 )%
(Discount)/Premium 52-week average (13.5 )% (1.2 )% (5.9 )% (1.2 %) (3.8 )% (2.7 )% (2.1 )%
Target Term N/A 2022   2022   2022   2022   2021   2021  

Source: CEF Connect.1

  • As of August 15, 2019, the Fund’s net earnings still do not cover its pro forma annual distribution of $1.32 (representing an 8.9% yield on the market price as of August 30, 2019).2 When Dolphin began communicating with the management and the Board of Trustees starting in September 2018, the Fund’s public filings indicated a distribution deficit of approximately 30.1%.3 Nearly a year later, the Fund continues to fail to earn its distribution by approximately 26.7%.4 If FSD only distributed its net earnings, the adjusted current annual distribution would be approximately $0.97 (representing a 6.6% yield on the market price as of August 30, 2019). With the exception of BSL, which earned 97% of its distribution, and EFL, which historically earned its distributions other than the most recent fiscal quarter, the other funds referred to in the above table all earned their annual distributions as of their most recent public filings.
  • FSD’s pro forma distribution reflects approximately 22% leverage (six month report ended April 30, 2019).
  • FSD’s perpetual structure and fixed coupon holdings with maturities generally approximating five-to-six years expose investors to widening credit spread risk.

In January 2017, in response to a shareholder proposal and upon recommendation of First Trust Advisors L.P. (the “Advisor”), the Board of Trustees of the Fund approved a tender offer to shareholders of FSD at 98% of NAV, as of July 14, 2017, for up to 15% of FSD’s outstanding shares, subject to pro ration funded by the sale of portfolio securities. The Fund also raised the monthly distributions for one year to maintain a yield of 8.5% based upon the Fund’s annual monthly NAV per share. In exchange for the above corporate actions, the proponent of the shareholder proposal entered into a two-year standstill agreement expiring in January 2020.5

Notwithstanding the above, the Fund acknowledged that these actions may only provide a temporary solution stating that “[t]here can be no assurance that this [o]ffer will reduce or eliminate any discount of the [s]hares…Historically, tender offers have resulted in only a temporary reduction in a fund’s discount.”6 The enhanced dividend policy expired in February 2018. After expiration of the tender offer and the enhanced dividend, notwithstanding continued share repurchases,7 the Fund’s market discount to NAV re-expanded to current levels.

1 The table includes securities selected with stated Target Terms near the three-year Target Term specified in Dolphin’s Original Proposal made nearly a year ago.
2 FSD Rule 19a-1 Notice dated August 15, 2019.
3 FSD Rule 19a-1 Notice dated September 17, 2018.
4 FSD Rule 19a-1 Notice dated August 15, 2019.
5 FSD Schedule 13D/A filed January 23, 2017.

Subsequent, Dolphin and its representatives had extensive continuous communications with the Fund’s management, members of the Board of Trustees and its counsel from September 2018 to April 2019, including communications with respect to Dolphin’s non-binding Original Proposal. In December 2018, Dolphin submitted its revised proposal, the Original Proposal, pursuant to Securities Exchange Act Rule 14a-8 (“Rule 14a-8”) in connection with the Fund’s Annual Meeting of Shareholders to be held on April 8, 2019 (the “2019 Annual Meeting”). Unfortunately, even after Dolphin made revision at FSD’s request, the Board of Trustees and management went to extraordinary and no doubt costly lengths to exclude the Original Proposal from the 2019 Annual Meeting.8 As a result, shareholders of the Fund were not given the opportunity to consider the non-binding Original Proposal, which, if it had been presented to and approved by the Fund’s shareholders (and approved and enacted by the Board of Trustees), Dolphin believes would have benefited all FSD shareholders by significantly closing the persistent market discount to NAV, which has remained approximately 13% (as of August 30, 2019).

Dolphin’s Resubmitted Proposals

Based upon the foregoing, Dolphin believes that the Board of Trustees should take all necessary action to implement Dolphin’s Original Proposal. To be clear, this is neither a shareholder proposal submitted pursuant to Rule 14a-8 nor a proposal being submitted pursuant to the Fund’s declaration of trust or bylaws. Rather, Dolphin requests the Board of Trustees reconsider its position with regard to the Original Proposal because of the composition and structure of the Fund and the persistent valuation gap relative to NAV.

Dolphin believes that reconsideration of the Original Proposal by the Board of Trustees without safeguards may present a conflict of interest between FSD and management (including the Advisor and its sub-advisor, Mackay Shields L.L.C. (the “Subadvisor”)). The Advisor and the Subadvisor benefit from direct and indirect receipt of management fees and the Fund being perpetual. For the six months ended April 30, 2019, FSD’s total expenses (including the Fund’s investment advisory fees) were approximately 1.20% of average nets assets (excluding interest expense).9 The Advisor and the Subadvisor also have a financial incentive to leverage the Fund and have increased the leverage of the Fund since 2017. We further note that, as of the date hereof, the Advisor advises fourteen closed-end funds other than FSD, including First Trust Senior Floating Rate 2022 Target Term Fund (NYSE Ticker Symbol: FIV) noted above. Each of these closed-end funds is perpetual (with the exception of FIV) and Dolphin believes none of these funds are of a type substantially similar to FSD and would therefore not be an appropriate merger partner for FSD.

6 Exh. 99(a)(1)(i) to Schedule to Issuer Tender Offer Statement, filed June 14, 2017.
7 Semi-Annual Report of FSD for the six months-ended April 30, 2019 (“For the six months ended April 30, 2019, the fund repurchased 377,297 of its shares at a weighted-average discount of 14.17% from the net asset value per share” and “[t]he Fund expects to continue to repurchase its outstanding shares until the earlier of (i) the repurchase of an additional 1,644,037 common shares (for an aggregate of 1,730,614), or (ii) March 15, 2020.”).
8See SEC No-Action Letter dated February 27, 2019. Dolphin believes the Board of Trustees of the Fund would have authority to implement the Original Proposal under the Fund’s declaration of trust.
9 Semi-Annual Report of FSD for the six months-ended April 30, 2019.


Closing the valuation gap between the market price and NAV is in the best interest of FSD shareholders. Dolphin submits that the Board of Trustees would have expeditiously accomplished this outcome by implementing the Original Proposal. While FSD’s proxy statement for the 2019 Annual Meeting discloses that, as of December 31, 2018, Trustees and officers of the Fund beneficially owned 9,515 shares, Dolphin nevertheless is seeking the independent and disinterested trustees of the Fund to take immediate action to benefit all shareholders.

Nearly a year ago, Dolphin and its counsel communicated with FSD’s management and outside counsel, in which there was extensive review of FSD’s objections to Dolphin’s proposals. Dolphin was not moved by FSD’s protestations. Dolphin believes that implementing a short-term Target Term and Target Term NAV would be beneficial to all shareholders by closing the persistent sizeable valuation gap. On September 3, 2019, Dolphin, through its counsel, forwarded a prior version of this letter to FSD, providing FSD extensive opportunity to review or comment on any pertinent fact contained therein or that the Fund believed to be inaccurate. FSD responded by way of a letter, dated September 4, 2019, to Dolphin with a copy to its counsel. The import of FSD’s September 4, 2019 letter was that the Fund had received Dolphin’s September 3, 2019 letter, the Board of Trustees would review the facts contained therein and that upon completion of their review, they would seek a dialogue. During the days after Dolphin’s receipt of FSD’s September 4, 2019 letter, Dolphin’s counsel repeatedly sought appropriate contact with FSD, but received no response.

On September 12, 2019, FSD indicated that a senior member of the Advisor was available to converse with Dolphin directly. Dolphin declined because the Advisor and Dolphin had significant dialogue nearly a year ago. Dolphin has offered to communicate with the independent and disinterested members of the Board of Trustees. After 10 days since Dolphin’s September 3, 2019 letter to FSD, and Dolphin repeatedly seeking confirmation that FSD has no comments with regard to the factual references contained in Dolphin’s letter, Dolphin has not received substantive comments from FSD.

    Very truly yours,
    Dolphin Limited Partnership I, L.P.
    By: Dolphin Associates, L.L.C., its General Partner
    By: Dolphin Holding Corp., its Managing Member
    By:   /s/                                               
Name: Donald T. Netter
    Title: Senior Managing Director

We Are Diffrent
Is your business listed correctly on America’s largest city directory network of 1,000 portals?