Portfolio Update

RNS Number : 6705M

NB Global Floating Rate Income Fund

18 July 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 NB Global Floating Rate Income Fund Limited's (the "Fund") investment objective is to provide its shareholders with regular dividends, at levels that are sustainable, whilst preserving the capital value of its investment portfolio, utilising the investment skills of the Investment Managers.

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 four 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, returned 1.4% in the second quarter of 2014.  This was similar to the return in the first quarter of 2014 (1.2%) and was generated primarily from income, bringing the first six months total return to 2.6%.  Consistent with the trend from the first quarter of 2014, lower quality issuers continue to outperform year-to-date, with CCCs returning 7.5%, Bs returning 2.4% and BBs returning 1.6%.

Weaker than expected economic figures drove a decline in the 10-year US Treasury from 3.0% at year-end 2013 to 2.5% on June 30, 2014.  This unexpected decline in rates resulted in loans underperforming other fixed rate asset classes such as High Yield, High Grade and Treasuries during the second quarter of 2014 and underperforming High Yield and High Grade for the first half of 2014.

With lower rates, also came lower interest rate expectations for the future.  This resulted, for the week ended April 16th, in the first weekly outflow from retail funds after 95 consecutive weeks of inflows.  Retail outflows continued in ten of the last eleven weeks of the second quarter of 2014, resulting in an AUM reduction of over $8bn in retail funds.  However, the outflow from retail investors was more than offset by strong demand from CLO investors.  CLO issuance in quarter two 2014 reached an all-time high of $38bn, bringing year-to-date issuance to over $60bn, and placing CLO demand as the driving force behind the market year-to-date.

In Europe, the S&P European Leveraged Loan Index (ELLI) built on its first quarter of 2014 return of 0.52% with a strong 2.38% return in the second quarter of 2014. The first quarter was impacted by a number of one off issuer specific credit events which weren't repeated in the second quarter and, additionally, a supply/demand imbalance. During the quarter we saw record repayments to the ELLI of €16.6bn, the highest quarterly reading since it started in 2003 and, despite robust new issuance, S&P/LCD commentary estimates that the loan market saw net inflows into the market of €7.6bn, meaning managers turned to the secondary market to put money to work, pushing prices up.

US institutional new issue volume remained strong in the second quarter and at $114bn was just $2bn off what we saw in the second quarter of 2013. Whilst total issuance of $240bn for the half year to the end of June 2014 is still some $25bn behind what we saw in the first half of 2013, positively, within this, we have seen less refinancing by existing issuers and more M&A/LBO related activity.  This is evidenced by the fact that the S&P/LSTA Index has grown $75bn so far this year to $750bn versus $43bn of growth seen for the same period in 2013. Supply and demand were relatively balanced during the second quarter, resulting in slightly higher yields on new issues and virtually no opportunistic repricings/refinancings.

Europe has seen €27bn of institutional issuance in the first half of 2014 versus €20bn in 2013. Interestingly, we have seen pressure generally on recent European pricing and Europe pricing more often at similar levels to the US, which is a reflection of both the technical demand/supply imbalance referenced above and the growing comfort with the European macro economic situation.

As expected, the US default rate increased to 4.4% by principal at the quarter end after the default of Energy Futures (TXU) in April.  On an issuer basis, the trailing 12 month default rate remains very low at just 0.8% as at the end of June 2014.  We continue to believe that the fundamental credit backdrop will remain healthy and that the default rate in the US will remain low, below 2.0% (excluding Energy Futures) for the full year 2014. There is very little in the way of near term maturities and we expect issuers will retain strong cash balances.

The European default rate rose from 4.4% at the end of March to 5.1% at the end of June.  Year-to-date, it has largely been affected by two sizeable defaults: Vivarte, a French retailer and Autobar, a UK vending machine business, which together account for around 3.6% of the ELLI.  As with TXU in the US, we consider these defaults to be exceptions rather than a trend and expect European default rates to be within 4.0% for the full year.

Portfolio Management

The Portfolio, as at 30 June 2014:

·     was split 90.21% USD, 5.61% EUR, 4.18% GBP (excluding Cash)

·     had 0% allocated to bonds out of the maximum 20% allowable

·     was invested primarily in B (53.73%) and BB (35.36%) rated investments¹

Given the aforementioned rally in fixed rate instruments, including High Yield, we further reduced our bond weight in the fund to zero.  The High Yield market traded inside of 5%, and as such, we saw limited value relative to loans and therefore took gains in these securities and redeployed the proceeds into new issue loans.  We were active in our European holdings as well, where we saw technical conditions diverge from the US, particularly in April, and we were able to realise gains on European positions, swap into US names at lower prices and invest in the new issue market in Europe.

Outlook

We remain positive on the loan market and our full year total return expectation for the asset class is in the 3 - 5% range. We expect the return in the second half of the year to be driven mainly by coupons as it was in the first half.  We believe that loans continue to offer attractive relative value compared to other fixed income instruments, particularly as rates begin to rise, as we have experienced in recent weeks on the back of stronger economic results.

Source: BNP Paribas. Data as at 30 June 2014.

1.   Source: 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 investment management firms, managing approximately $257 billion in assets as of June 30, 2014. Neuberger Berman provides a broad range of global investment solutions to institutions and advisors 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. 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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