Unlocking 5.5% Income & Capital Appreciation: Virtus Convertible & Income Fund II's Preferred Shares (NCZ PR A) Post-Call Protection

In an era of tepid bond yields and volatile equity markets, investors are increasingly drawn to instruments that balance income generation with capital preservation. The Virtus Convertible & Income Fund II's Series A Cumulative Preferred Shares (NCZ.PR.A) now present a compelling opportunity to capture a robust 5.5% annual dividend yield, backed by an “A” credit rating and strategic post-call protection dynamics. As of June 2025, this security trades at a significant discount to its liquidation value, offering a rare dual-play on income and capital gains.

A Consistent 5.5% Yield in a Low-Yield World

The NCZ.PR.A's dividend history is a testament to its reliability. Since its 2018 issuance, the security has delivered a steady $1.375 annual dividend per share, equating to a 5.5% yield based on its $25 liquidation preference. . This consistency is underscored by its “A” credit rating from Fitch Ratings, reflecting the fund's strong capacity to meet obligations even under adverse conditions.

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Call Protection Expiration: A Catalyst for Value

The July 2023 expiration of NCZ.PR.A's call protection marked a pivotal shift. Prior to this date, the fund could not redeem the shares at the liquidation value of $25 (adjusted to $6.25 post-February 2025 stock split). Now, however, the issuer has the flexibility to call the shares at any time. This dynamic creates two favorable scenarios:
1. Income Stability: If the fund does not call the shares, investors retain the 5.5% yield indefinitely.
2. Capital Appreciation: If called, shareholders would receive the liquidation value ($6.25 post-split) plus accrued dividends, creating an immediate gain given the current market price of ~$12.21—a 51% discount to liquidation value.

Valuation: A Discounted Asset with Built-In Safeguards

The current price of ~$12.21 reflects a significant discount to both liquidation value and intrinsic worth. This valuation gap arises from broader market sentiment toward leveraged closed-end funds and preferred shares, which have underperformed in risk-off environments. Yet, three factors make NCZ.PR.A an outlier:
- Portfolio Quality: The fund's portfolio, weighted 58.85% in convertible securities and 37.92% in high-yield bonds, offers diversification and upside in rising equity markets.
- Leverage Management: With effective leverage at 38.27%, the fund maintains a disciplined balance between risk and return.
- Dividend Certainty: As a cumulative preferred share, missed dividends must be paid before common shareholders, adding a layer of protection.

Risks, but with a Margin of Safety

No investment is without risk. Key concerns include:
- Interest Rate Sensitivity: Rising rates could pressure preferred share prices. However, NCZ.PR.A's fixed dividend and discount to liquidation value act as a buffer.
- Call Risk: While a call would deliver capital gains, it might deprive investors of future income. Yet, the fund's preference for maintaining capital access suggests a call is unlikely unless market conditions favor it.
- Liquidity: Though trading volume is modest, the security's structured nature and rating provide stability.

Why Act Now?

The confluence of a 5.5% yield, an “A” rating, and a post-call protection environment creates a rare asymmetric opportunity. Investors gain:
- Income: A high yield in an era where 10-year Treasuries yield ~3.8%.
- Capital Appreciation Potential: A 51% discount to liquidation value implies significant upside if the shares are called or market sentiment improves.
- Safety: The fund's conservative leverage and high-quality portfolio mitigate downside risks.

Final Call to Action

NCZ.PR.A is a security that rewards patience and strategic foresight. With a dividend that has stood the test of time, a credit rating that signals resilience, and valuation that discounts its intrinsic worth, this preferred share offers a rare trifecta of income, appreciation potential, and risk mitigation. For income-focused investors willing to look beyond crowded markets, now is the moment to act.

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Invest wisely—and act decisively.