Proposes Replacing Existing Trustee and Manager—Artemis Investment Management Limited—and Terminating and Winding-up Citadel Income Fund to Maximize Value for All Unitholders
Saba Capital Management, L.P. ("Saba"), as manager of certain investment funds collectively holding more than 20% of the outstanding Units (“Units”) of Citadel Income Fund (“Citadel” or the “Fund”) today sent Citadel a letter requisitioning a special meeting of unitholders (“Meeting”) to, among other things, replace the trustee and manager of Citadel, Artemis Investment Management Limited, and approve the termination and wind-up of Citadel.
Saba also issued an Open Letter to All Citadel Income Fund Unitholders focusing on the Fund’s chronic underperformance, unitholder dissatisfaction, poor corporate governance, and the resulting need for immediate change, highlighting:
- Based on the Fund’s NAV and its traded price on February 3, 2023, a return to NAV via termination and wind-up would result in an immediate gain of 28%, inclusive of payment of Citadel’s off-market and undeserved 5% termination fee.
- Citadel’s Units have traded at an average discount of -24% to NAV over the last ten years and -29% over the last year.
- Extremely high level of redemptions totaling approximately 75% of the outstanding Units indicates dissatisfaction among unitholders in a Unit with dismal liquidity.
- Saba’s attempt to engage constructively with Citadel which has effectively been ignored reflecting the deficient governance practices within the Fund.
- Saba’s request that Artemis waive the unprecedented entrenchment provision in the Declaration of Trust that unfairly and illogically prevents any requisitioning unitholder’s vote from counting at the Meeting.
The full text of Saba’s letter to Citadel Unitholders is as follows:
February 27, 2023
Dear Fellow Unitholders of Citadel Income Fund:
Saba Capital Management (“Saba”) has submitted a letter requisitioning a special meeting of unitholders (“Meeting”) to Citadel Income Fund (“Citadel” or “Fund”) for the purpose of replacing the current trustee and manager of Citadel, Artemis Investment Management Limited, and approving the Fund’s wind-up and liquidation.
As the Fund’s largest unitholder, representing more than 20% of the outstanding Units (“Units”) of Citadel, and as a leading investor in closed-end funds, Saba has identified a number of significant issues at Citadel, including abysmal trading performance resulting in an extraordinarily high discount to Net Asset Value (NAV), an extremely high level of Unit redemptions, the Fund’s historically exorbitant expense ratio, and unacceptable corporate governance. We have attempted to constructively engage with the Fund to address our concerns that include:
Over the last ten years, Citadel’s Units have traded at an average discount of -24% to NAV. Over the past year, the Fund has traded at an average discount to NAV of -29%. This trading discount goes far beyond what unitholders should accept.
The Fund’s returns, as included in its 2021 Annual Report1, show that the annual returns have significantly underperformed their benchmark over time:
Citadel Income Fund (Market Price)
iShares S&P/TSX 60 Index Fund
Redemption Rate Reflects Substantial Dissatisfaction Among Unitholders
The Fund’s abysmal performance has caused substantial dissatisfaction among its unitholders. This is evident in the high level of annual redemptions of Fund Units by our fellow unitholders, who are utilizing the only available avenue to exit their illiquid investment. Given that the annual redemption is limited to 10% of the public float, it would appear that approximately 75% of the outstanding Units were submitted for redemption in 2022.
After years of the Fund’s poor performance, our proposal for the termination and wind-up of the Fund is one that unitholders can be excited about, as it would provide them with a superior return of 28% based on the Fund’s NAV and its traded price on February 3, 2023, inclusive of the payment of Citadel’s off-market and undeserved 5% termination fee that we are trying to eliminate. This would finally be an opportunity for unitholders to exit what has proven to be a chronically underperforming investment.
Poor Corporate Governance Record
Beyond poor financial performance, certain other factors have informed our recommendations and requisition of a special meeting, including the following examples of unprecedented failed corporate governance:
- Complete Lack of Engagement: Current management of the Fund has shown a complete unwillingness to constructively engage with the Fund’s unitholders.
- Unprecedented Entrenchment Provisions and Complete Disregard of Unitholder Rights: We have never encountered a governance structure that is so clearly and deliberately designed to entrench management. For example, under the terms of the Declaration of Trust, the threshold to requisition a meeting is 20%, which is a significant deviation from other funds—where the standard threshold is five percent (or ten percent, at most). To us, this threshold reflects an intentional shield created to prevent unitholders from having any rights to express their views.
To make matters even worse, any requisitioning unitholder—required to hold at least 20% of the issued and outstanding Units—is NOT ALLOWED TO VOTE their Units at the meeting they requisition, as the Declaration of Trust deems a requisitioning party to be an “interested party” whose votes will not count. This represents a total affront to unitholder rights and democracy. The lack of unitholder rights, coupled with severe illiquidity of the Units, traps all unitholders in an investment that suffers from consistent market underperformance, where the only stakeholder that wins is Artemis Investment Management Limited which continues to collect its fees regardless of their poor track record. It is difficult to understand how as a fiduciary it believes the status quo is in the best interest of the Fund and its unitholders.
In order to ensure that the interests of all unitholders are properly considered, Saba is requesting that Artemis confirms that it will waive the unprecedented entrenchment provision in the Declaration of Trust and allow it to vote all of its Units at the Meeting.
Saba Has Attempted to Engage Constructively with the Trustee and Manager
Saba submitted a letter to Artemis in May 2022. In that letter, Saba communicated that it is not in the best interests of the Fund or its unitholders to maintain the status quo. We requested immediate action, including the calling of a special meeting of unitholders and considering the termination and wind-up of the Fund in accordance with the Fund’s Declaration of Trust. Other than a dismissive response from the trustee and manager, Saba’s requests have been largely ignored as of the date of this letter. It would appear that Artemis believes that it can continue to milk the Fund, which it treats as a “cash cow”, by earning undeserved management fees at the expense of unitholders.
As a result, Saba determined that its only option to maximize value for itself and its fellow unitholders was to increase its stake to over 20% and requisition the Meeting. As part of this requisition, and as noted above, we are requesting that Artemis waive the provision in the Declaration of Trust that would preclude Saba’s vote from counting at the Meeting.
Go-Forward Strategy to Maximize Value for All Unitholders
Given the enormous trading discount to NAV, the extraordinary number of redemptions each year and the resultant increasing expense ratios, unitholders are not benefiting from the Fund. Saba has determined that the termination and wind-up of the Fund is in the best interest of the Fund and its unitholders and will unlock the Fund’s underlying value and provide unitholders with a return on their investment much greater than the returns offered by the Fund. Based on current values, Saba believes that its proposal would result in an immediate 28% return2 to unitholders, from the collapsing of the discount to NAV.
The Trustee of the Fund is required under the Fund’s Declaration of Trust to act in the best interests of unitholders and the Manager of the Fund is required, under the Declaration of Trust, to act in the best interests of the Fund. We expect the Meeting to be held “expeditiously and within a reasonable time” and “without unreasonable or unjustifiable delays” in accordance with applicable laws.3 To this end, our expectation is that the Meeting will be held no later than April 27, 2023.
In connection with the Meeting, Saba has entered into an agreement with Covista Capital Corp. (“Covista”) and Spencer MacCosham, who, if approved by unitholders, will serve as successor manager and trustee of Citadel, respectively. If approved by unitholders at the Meeting, upon Mr. MacCosham being appointed as successor trustee, a notice will be sent removing the existing manager as manager of Citadel, appointing Covista as successor manager, and effecting the termination and wind-up of Citadel as promptly as practicable following the Meeting.
A confidential, non-public, and non-contentious process was Saba’s preferred method. Saba has been given no choice but to address its fellow Citadel unitholders and will take all necessary actions to ensure a favorable outcome for all unitholders.
We are confident that you, our fellow Unitholders, share our views and we thank you for your support going forward.
Saba Capital Management, L.P.
FOR MORE INFORMATION:
Saba Capital Management, L.P.
405 Lexington Avenue, 58th Floor
New York, NY 10174
About Saba Capital Management
Saba Capital Management, L.P. is an Investment Adviser launched in 2009. Saba is a spin-out of one of the largest proprietary groups in the industry, ‘Saba Principal Strategies’, founded by Boaz Weinstein at Deutsche Bank in 1998. Saba’s senior investment team began working together at Deutsche Bank in the early 2000s, and is best known for having pioneered credit relative value and capital structure trading strategies. Saba currently manages four core strategies: Credit Relative Value, Tail Hedge, SPACs and Closed-End Funds. Saba’s investors are predominately institutions and include corporate pensions, public pensions, foundations, fund of funds, endowments, and family offices. Saba is 100% self-owned. Saba is headquartered in the historic Chrysler Building in New York and is registered with the SEC and CFTC.
Ceasing to File under Part 4 of National Instrument 62-103
Saba also announced today that it has ceased filing reports in accordance with the alternative monthly reporting system under Part 4 of National Instrument 62-103 – The Early Warning System and Related Take-Over Bid and Insider Reporting Issues (“NI 62-103”) for Citadel. Since the last AMR report filed on February 10, 2022, Saba increased the position of funds it manages in the Issuer by 120,000 Units to 2,176,014 Units (21.19%) of the outstanding Units, which 120,000 Units were acquired for an aggregate price of $319,434, at an average cost of $2.66 per Unit.
Saba manages private investment funds, including Saba Capital Master Fund, Ltd., Saba Capital Income & Opportunities Fund, Saba Capital CEF Opportunities 2, Ltd., and Saba Capital CEF Opportunities 3, Ltd. (the “Funds”). In its role as manager, Saba has exclusive control over all of the securities of Citadel described in this news release. All of the securities identified in this news release are owned by the Funds.
On February 27, 2023, Saba sent a letter to Citadel requisitioning the Meeting of the holders of Units to consider, among other things, removing each of the trustee and manager of Citadel and replacing them with MacCosham and Covista, respectively, approving certain amendments to Citadel’s declaration of trust, including the removal of any fee payable to the manager upon termination or resignation and the payment of an additional fee of $100,000 to the successor manager upon the termination and wind-up of Citadel, and approving the termination and winding-up of Citadel. The letter also requests that the trustee and manager waive the provisions in the Declaration of Trust that would prevent the Funds, as “Interested Parties”, from voting on any “Ordinary Resolution” or “Extraordinary Resolution” in connection with the Meeting.
In connection with the requisition, Saba may communicate with, and engage in public or private solicitation of, holders of Units in advance of the Meeting. Saba may also take such further actions with respect to its investments in Citadel as it deems appropriate, including to continue evaluating the performance of Citadel and the value of the Units, and to continue to analyze and assess Citadel’s business, assets, operations, financial condition, capital structure, management and prospects, as well as Citadel’s corporate governance practices. Depending upon such factors that Saba may from time to time deem relevant, Saba may from time to time, among other things: (i) engage in discussions with other unitholders or representatives of Citadel concerning, among other things, the trustee of Citadel, the manager of Citadel, and the prospects, business or strategy of Citadel, including potential changes to the foregoing; (ii) acquire additional Units of Citadel; (iii) dispose of some or all of its Units; (iv) surrender its Units for redemption; and/or (v) take any other such actions with respect to Citadel as Saba may from time to time deem appropriate.
Saba has entered into an agreement with Covista and MacCosham as of February 27, 2023 pursuant to which, among other things, Saba will requisition the Meeting and Covista and MacCosham will, if their appointment is approved by unitholders, act as successor manager and trustee of Citadel, respectively, provide such information as is required to be included by Saba in any dissident proxy circular, upon being appointed as successor trustee send a notice removing the existing manager as manager of Citadel and appointing Covista as successor manager and effect the termination and wind-up of Citadel as promptly as practicable following the Meeting. Pursuant to the agreement, Saba has agreed to reimburse Covista for its reasonable and documented legal expenses in connection with the matters contemplated by the agreement up to a maximum specified amount and to pay Covista an amount if (i) MacCosham is appointed as successor trustee of the Fund at the Meeting and serves as trustee until the Fund is terminated and wound-up, and (ii) Covista is approved as successor manager at the Meeting and Covista does not act as manager of the Fund for a reason outside of its and MacCosham’s control.
Saba controls the Units described in this news release on behalf of the Funds for investment purposes. In fulfilling its responsibilities to the Funds, Saba may make its views known regarding the operation of the business and strategic direction or alternatives to Citadel’s trustee or manager from time to time, when proxies are solicited and on other occasions. Depending on market conditions and other factors that Saba may deem material to its investment decisions, Saba may, on behalf of the Funds, in the future acquire additional Units or other securities of Citadel in the open market or in privately negotiated purchases or otherwise. Saba may also, on behalf of the Funds, depending on then-current circumstances, dispose of all or a portion of the Units, in one or more transactions, surrender some or all of its Units for redemption and/or take any other such actions with respect to Citadel as Saba may from time to time deem appropriate, in each case to the extent then permitted by applicable law and regulation. Other than as described in this news release, Saba does not have any plans or intentions with respect to any of the items enumerated in Item 5 of Form 62-103F2.
A report on Form 62-103F2 – Required Disclosure by an Eligible Institutional Investor under Section 4.3 is being filed by Saba in accordance with NI 62-103 and will be available under Citadel’s SEDAR profile at www.sedar.com.
This press release is for informational purposes only and is not a solicitation of proxies. Any proxies solicited in respect of the Meeting will be solicited by Saba pursuant to an information circular or as otherwise permitted by Canadian corporate and securities laws.
Disclaimer for Forward-Looking Information
Certain information in this news release may constitute “forward-looking information” within the meaning of applicable securities legislation. Forward-looking statements and information generally can be identified by the use of forward-looking terminology such as “outlook”, “objective”, “may”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “believe”, “should”, “plans”, “continue”, or similar expressions suggesting future outcomes or events. Forward-looking information in this news release may include, but is not limited to, statements of Saba regarding (i) the requisitioned meeting, (ii) how Saba intends to vote on the resolutions proposed by the requisition, (iii) the proposed replacement of the trustee and manager of Citadel, and (iv) the proposed termination and wind-up of Citadel.
Although Saba believes that the expectations reflected in any such forward-looking information are reasonable, there can be no assurance that such expectations will prove to be correct. Such forward-looking statements are subject to risks and uncertainties that may cause actual results, performance or developments to differ materially from those contained in the statements including, without limitation, the risks that (i) Citadel may attempt to not accept the requisition or call the requisitioned meeting, (ii) the requisitioned meeting, if called, may not proceed for any reason whatsoever, and (iii) the proposed trustee and manager may cease to stand for appointment as successor trustee and manager for any reason. Except as required by law, Saba does not intend to update these forward-looking statements.
A copy of this news release may be obtained on Citadel's SEDAR profile at www.sedar.com. The head office of Citadel is 1325 Lawrence Avenue East, Suite 200 Toronto, ON M3A 1C6. The address of Saba is 405 Lexington Avenue, 58th Floor New York, NY 10174.
1 See Annual Reports on the Fund’s profile at https://www.sedar.com/.
2 After taking into account management fees, and other fees, that would be payable on termination.
3 Sandpiper Real Estate Fund 4 Limited Partnership v. First Capital Realty Real Estate Investment Trust, 2023 ONSC 794, at paras. 14 & 61.
For further information: