RiverNorth Opportunistic Municipal Income Fund, Inc. (RMI)

The appeal of municipal bonds to individual investors has always been simple: the interest is not subject to federal income tax — a feature that makes lower nominal yields on munis competitive with taxable bonds for high-income earners.

RiverNorth Opportunistic Municipal Income Fund is a closed-end fund whose sole purpose is to build a portfolio of municipal bonds — debt issued by states, cities, counties, and other local authorities to finance infrastructure and operations — and distribute the income to shareholders. The fund is managed by RiverNorth Capital Management, an alternative-investment manager specializing in closed-end and interval funds focused on income generation.

Municipal bonds carry an inherent tax advantage: their interest is exempt from federal income tax and often from state income tax as well if the investor lives in the state that issued the bond. This tax exemption makes a municipal bond yielding 3 percent economically equivalent to a taxable bond yielding 5 percent (at a 40 percent marginal tax rate), a straightforward math that has made munis attractive to wealthy and upper-middle-class investors for over a century.

RMI’s strategy is to capture that tax-advantaged income on behalf of shareholders. The portfolio includes investment-grade and speculative-grade municipal bonds, pre-refunded munis (bonds where the principal has been secured by a trust of U.S. Treasuries), and other municipal securities. The fund distributes income monthly, with the distribution structured to maximize tax efficiency — the portion attributable to tax-exempt interest flows through to shareholders as tax-free, while any capital gains or short-term trading gains are taxable.

The supply chain: issuers, the secondary market, and leverage

RMI depends upstream on the municipal bond market. State and local governments issue munis to fund everything from school construction to water systems to highway repairs. The primary market for new issuance has historically been deep; the secondary market for existing munis is fragmented and less liquid than the corporate bond market, which creates both opportunity and risk for managers. A skilled manager can find undervalued bonds or spot weakening municipal credits before the market does.

Downstream, RMI shareholders are principally high-income individuals seeking tax-efficient income. They supply capital in exchange for a monthly check that is partially or fully tax-free. The fund’s appeal hinges on the manager’s ability to deliver that yield without taking on undue credit risk.

The fund commonly employs leverage — borrowing money to purchase additional bonds — to amplify the distribution. This is a classic closed-end fund strategy: if the fund can borrow at 3 percent and invest in munis yielding 4 percent after-tax, the spread accrues to shareholders. But leverage is a double-edged tool. If rates rise sharply or if credit concerns emerge, borrowed capital becomes expensive and the fund’s economics can deteriorate.

Credit risk and issuer distress

The core risk in RMI’s portfolio is municipal credit risk. Some issuers are creditworthy and stable; others face fiscal pressures from declining tax bases, rising unfunded liabilities (especially pension obligations), or economic deterioration. The 2010s saw a wave of smaller municipal defaults and restructurings, and individual bonds and portfolios remain vulnerable to local economic shocks. The fund’s portfolio will include some lower-rated bonds in search of higher yield, meaning it is betting on the stability of the underlying issuer.

The fund is also dependent on continued tax-exemption status. Any significant federal or state change to the tax treatment of municipal bond interest would alter the fundamental appeal of the investment. This is a low-probability but significant tail risk.

Researching RMI

The fund’s prospectus and 10-K (SEC CIK 0001746967) detail the portfolio composition by state and by credit rating, the leverage structure, and the historical distribution. Key metrics are the current yield (gross and tax-adjusted), the duration of the bond portfolio, the percentage of the distribution that is tax-exempt versus taxable, and the credit quality breakdown. The fund’s track record through municipal credit cycles — has it preserved capital and distributions through downturns? — indicates the manager’s skill or luck. The discount or premium to net asset value and the coverage ratio (can the portfolio income cover the distribution, or is capital being returned?) are also revealing. For a high-income investor in a high-tax state, the after-tax economics might justify the purchase; for others, the tax-exempt feature is not an advantage.