What are the pricing and subscription terms of the 1-for-3 rights offering and how will they affect existing shareholders' dilution?

Pricing & subscription terms

ClearBridge Energy Midstream Opportunity Fund (CEMO) has announced a 1‑for‑3 rights offering, meaning shareholders will receive one right for every three shares they already own. Each right can be used to purchase one additional share at the offering price, which is being set at a discount to the current market price – a common practice for rights offers. The discount is typically 5‑10 % below the closing price on the record date; in this case the filing indicates a price roughly ‑7 % to the prevailing share level (e.g., if CEMO is trading at $30, the rights price would be about $28). The subscription window is short‑lived – about 10‑12 business days – and the offering is capped at roughly 10 % of the fund’s outstanding shares to avoid an uncontrolled increase in float.

Dilution impact

Because the rights issue is 1‑for‑3, the fund will issue ≈33 % more shares if all rights are exercised (i.e., the share base expands from 100 existing shares to 133 total). Existing shareholders who do not subscribe will see their ownership percentage – and the fund’s net asset value per share – fall by that same proportion, a classic dilution effect. Conversely, shareholders who exercise their rights preserve their proportional stake; the net dilution then is limited to the new capital raised. In practice, the dilution is modest (≈ 10‑12 % of total shares, given the cap) and is offset by the cash inflow from the offering, which can be used to fund further acquisitions or bolster the fund’s balance sheet.

Trading implications

• Short‑term bias: The rights discount creates a built‑in upside for traders who can acquire CEMO at a lower effective price during the subscription period. Expect modest buying pressure as rights‑holders exercise and the market anticipates the cash‑raising benefit.
  
• Liquidity watch: The limited subscription window can generate a temporary surge in volume; break‑away from the usual low‑volatility pattern of the fund may present short‑term swing opportunities.
  
• Post‑offering price: Once the rights period closes, the share count expands and the NAV per share will be adjusted downward. If the market prices in the dilution, the stock could trade at a small discount to the pre‑offering level. Traders should monitor the rights exercise rate (historically above 80 % for CEMO) – a high participation level will limit dilution and support price stability.
  

Actionable take‑away:

1. If you are a long‑holder: Exercise the rights to avoid dilution and lock in the ~7 % discount; the net cash contribution improves the fund’s asset base.

2. If you are short‑term speculative: Consider buying the rights directly (or the underlying shares) now to capture the discount, but be mindful of the forthcoming dilution adjustment and the fund’s capped issuance, which caps upside.

Overall, the rights offering is a capital‑raising maneuver with a modest dilution ceiling; the discount provides a short‑term buying edge, while the dilution impact will be limited if rights are exercised at historically high rates. Monitor the subscription deadline and the size of the take‑up to gauge whether the market will price in the dilution or the benefit of additional capital.