Portfolio Update - Ordinary shares

RNS Number : 7765X

NB Global Floating Rate Income Fund

16 January 2014

 



NOT FOR RELEASE, DISTRIBUTION OR PUBLICATION, DIRECTLY OR INDIRECTLY, TO U.S. PERSONS OR INTO OR IN THE UNITED STATES, AUSTRALIA, CANADA OR JAPAN.

NB Global Floating Rate Income Fund

Portfolio Update

The Neuberger Berman Global Floating Rate Income Fund Limited targets income generation whilst seeking to preserve investors' capital and give protection against rising interest rates.

The Fund's managers seek to generate this yield by investing in a global portfolio of below investment grade senior secured corporate loans with selective use of senior secured bonds, diversified by both borrower and industry. The Fund is managed by three experienced Portfolio Managers backed by what we believe to be one of the largest and most experienced credit teams in the industry.

Market Environment¹

The US Loan Market, as measured by the S&P/LSTA Leveraged Loan Index (the "Loan Index"), returned 5.29% for the full year 2013 which was in line with our forecast of 5-6%. Performance was generally strong throughout the year with only two months of negative performance, June and August. Furthermore, looking at the components of return, only 0.33% was from price with the majority/remainder from coupon. While loans underperformed high yield by about 200bp (5.3% vs. 7.4%), they significantly outperformed 10-Year Treasuries (-7.8%) and Investment Grade Credit² (-1.5%). The European market also performed well with the S&P European Leveraged Loan Index (ELLI) returning 8.59% for the year. Over half of this, 4.41%, was generated from price with the remainder from coupon, which does reflect the quality composition of the two respective markets in that the weighted average bid on the ELLI was 95 in the final reading of the year whereas in the US it was over 98. European high yield also outperformed its US counterpart in 2013 with the Merrill Lynch European High Yield Index returning 10.13% for the year with less of a reaction seen to Chairman Bernanke's comments in May regarding the potential introduction of tapering.   

Demand for loans was very strong from both retail funds ($70bn) and CLOs ($82bn) and this helped drive over $450bn of issuance during the year. While most of this issuance was refinancing related, we did see new money in the market from LBOs, M&A and recapitalizations. These new money deals resulted in an over $100bn increase in the size of the U.S. loan market, from $575bn to $682bn. Spreads were under pressure all year as excess demand drove the refinancing activity mentioned above. In all, issuers shaved approximately 115bp on $281bn of loans or approximately 42% of the FYE 2012 Loan Index. Additionally, a significant portion of the issuance in 2013 was covenant lite (57% of the total) and these loans now represent 46% of the U.S. loan market. In Europe, we saw robust new issuance levels of €65bn, a significant improvement on 2012's €29bn and, additionally, we saw record high yield bond issuance of €70bn, of which €32bn was senior secured. To date covenant lite issuance has been relatively limited in Europe but we do expect the market to follow the lead of the US during 2014, particularly as demand for the loan asset increases, driven by strong institutional demand and the re-awakening of the CLO market. In 2013 we saw €7.4bn of issuance in a market that had been basically closed since 2008.

Defaults picked up slightly throughout the year, from 1.27% to 2.11% by volume and from 1.36% to 1.61% by issuer count. In all, 11 issuers defaulted on $11.4bn of paper vs. 9 on $6.4bn in 2012. Approximately two thirds of the 2013 defaults came from five issuers including four yellow pages companies and one textbook publisher and all were well telegraphed by the trading price of the respective loans prior to default. European defaults came in lower than we forecasted at 2.9% by volume, the lowest reading since June 2011, and 4.9% by issuer count which indicates defaults are generally being experienced in the mid market space that we avoid.

We are forecasting a 2% default rate in the U.S. for 2014 which is below the long term average of ~3.5% (this excludes TXU which alone will lift the default rate by 3%). Our below trend forecast is driven by the lack of near term maturities (only $17bn of institutional loans come due in 2014/2015, about 2.6% of the Loan Index) and relatively small portion of the market that we consider high risk (excluding TXU, only 4.23% of the market is rated CCC+ or lower). We would also point out that the highest risk deals we saw from the most recent cycle had leverage of over 7.0x and interest coverage of less than 1.5x (cumulative defaults for this cohort were approximately 13% vs. just over 4% for deals with 4x leverage or less). There have been very few such deals done in recent years and none in 2013. We see similar trends in Europe and are forecasting a default rate in the 2 - 4 % range.

Portfolio Management

The Portfolio, as at 31 December 2013:

·     was split 88.1% USD, 7.7% EUR, 4.1% GBP (excluding Cash)

·     had 8.7% allocated to bonds out of the maximum 20% allowable

·     was invested primarily in B (53.7%) and BB (34.5%) rated investments³

Despite a lot of headlines about aggressive issuance in the loan market, we remain very comfortable with the portfolio. At year end, the average total and secured debt to cash flow for the issuers in the portfolio were a comfortable 5.6x and 3.9x, respectively. Furthermore, cash flow to interest expense was a robust 3.5x. At these leverage levels we are very comfortable that the issuers can generate free cash flow and continue to de-lever and this ability remains critical as we look to add new names to the portfolio. As a reminder, we have never had a default in the portfolio.

Outlook

The average bid of the Loan Index ended the year at 98.29 and an even higher 100.05 if you remove all issuers rated below B-. As such, we believe price gains for 2014 will primarily be limited to CCC and D rated issuers, which make up only 8% of the Loan Index. Therefore performance is likely to be driven primarily by coupon returns and the most likely downside risk is an exogenous shock that leads to a "risk-off" environment which causes outflows from the asset class.

1.   Source: S&P LCD.

2.   BAML High-Grade Corporate Index.

3.   Standard & Poor's.

-ENDS-

For further information please contact:

Neuberger Berman Europe Limited          [phone]

Anji Stewart

FTI Consulting                                              [phone]

Neil Doyle                   

Ed Berry

Laura Ewart

Background Information

The Company is a registered closed-ended investment company incorporated in Guernsey. The Company is managed by Neuberger Berman Europe Limited, which has delegated certain of its responsibilities and functions to the sub-investment manager, Neuberger Berman Fixed Income LLC, both of which are indirect wholly owned subsidiaries of Neuberger Berman Group LLC. The Company's investment objective is to provide its shareholders with regular dividends, at levels that are sustainable, whilst growing the capital value of its investment portfolio over the long term. To pursue its investment objective, the Company will invest mainly in floating rate senior secured loans issued in U.S. Dollars, Sterling, and Euros by North American and European Union corporations, partnerships and other business issuers.

Established in 1939, Neuberger Berman is one of the world's leading private, independent employee-controlled asset management firms, managing approximately $227 billion in assets as of September 30, 2013. Neuberger Berman provides a broad range of global investment solutions to institutions and individuals through customized separately managed accounts, funds and alternative investment products.  

Non-Mainstream Pooled Investments

The Company confirms that it conducts its affairs, and intends to continue to conduct its affairs, so that the Company's shares will be excluded securities under these the new rules and will therefore be excluded from the FCA's restrictions which apply to non-mainstream investment products.

This document is intended only for the person to whom it has been delivered. No part of this document may be reproduced in any manner without the written permission of NB Global Floating Rate Income Fund Limited ("NBGFRIF"). The securities described in this document may not be eligible for sale in some states or countries and it may not be suitable for all types of investors. Securities in the fund may not be offered or sold directly or indirectly into the United States or to U.S. Persons. Prospective investors are advised to seek expert legal, financial, tax and other professional advice before making any investment decision. The price of investments may fall as well as rise and investors may not get back the full amount invested. The target yield should not be taken as an indication of the Fund's expected future performance or results. The target yield is a target only and there is no guarantee that it can or will be achieved and it should not be seen as an indication of the Fund's actual or expected return. Statements contained herein, including without limitation, statements regarding the credit markets, are based on current expectations, estimates, projections, opinions and/or beliefs of the managers. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Such statements are necessarily speculative in nature, as they are based on certain assumptions. It can be expected that some or all of the assumptions underlying such statements will not reflect actual conditions. Accordingly, there can be no assurance that any projections, forecast or estimates will be realized. This document is not intended to be an investment advertisement or sales instrument; it constitutes neither an offer nor an attempt to solicit offers for the securities described herein. This document was prepared using the financial information available to NBGFRIF as at the date of this document. This information is believed to be accurate but has not been audited by a third party. This document describes past performance, which may not be indicative of future results. NBGFRIF does not accept any liability for actions taken on the basis of the information provided in this document. Neuberger Berman is a registered trademark.
© 2014 Neuberger Berman.

 

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