Portfolio Update

RNS Number : 4774E

NB Global Floating Rate Income Fund

10 April 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 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, returned 1.20% in the first quarter 2014, almost entirely from income.  As we have witnessed over most of the past three years, lower rated credits outperformed with BB's at 0.61%, B's at 1.20% and CCC's at 3.76%. The underperformance of BB-rated loans was primarily caused by managers continuing to look for higher yield than is typically offered in BB loans, where all-in yields are often below 3.5%. Conversely, second lien loans saw very strong performance in the quarter with a return of 2.32%.

In Europe the S&P European Leveraged Loan Index (ELLI) had a first quarter return of 0.52% with this return being affected by a number of pre-crisis transactions, none of which are held in the portfolio, suffering dramatic price drops. These were at the lower end of the rating spectrum as evidenced by the fact that the BB and single B segment of the Index returned 0.98% and 0.58% respectively.  

Loans underperformed other fixed income asset classes in the first quarter, as an unexpected decline in treasury yields, from ~3.00% to ~2.75%, favoured longer duration asset classes including Treasuries (+3.38%), High Grade (+2.97%) and High Yield (+3.00%).

US institutional loan volume in Q1 was down ~15% from Q1 2013, at $127 billion vs. $149 billion. However, 2013 was a record year for issuance and this lower level is still the second best Q1 on record. The primary driver of the reduced volume was a decline in refinancing activity as many companies have already pushed out maturities and/or refinanced into lower coupon tranches. Excluding refinancings, volumes were up year over year, primarily driven by M&A. Volumes are likely to proceed at the lower pace as the forward calendar suggests no significant pickup for the foreseeable future.

Europe has followed a similar trend with total volume down from €16bn in the first quarter of last year to €14bn this first quarter, albeit within the institutional segment that we participate in we have seen issuance rise 31% to €10bn. We believe, this has been driven by an increased level of cross border activity where global issuers look to source funding in US dollars, Euros and Sterling. Given our large cap focus, these are the type of businesses that we generally favour so we view this as a positive. It allows us to look at the pricing across the various currencies and make a relative value call between the tranches.

For the quarter, CLO's ($22 billion) and retail funds ($9 billion) continued to be the main sources of demand for loans with pension plans also being consistent contributors. In light of recent discussions by the Federal Reserve about rate increases, we expect loan demand to remain strong for the foreseeable future.

US defaults remained subdued throughout the quarter and ended at 1.21% by volume and 1.02% by issuer count. Both of these numbers are down slightly from year end. As we have previously mentioned, it is widely expected in the market that a larger issuer will default, as they are already in the middle of restructuring talks with lenders; this will result in ~3.5% increase in the volume weighted default rate while leaving the rate by issuer count at a still low 1.2%. We expect this benign default environment to persist over the next 12-18 months due to very few maturities through 2016, continued cash flow growth of loan issuers and solid liquidity cushions. We are also seeing a better environment in Europe and are expecting a 2 to 4% default rate for 2014. As at the end of March it is currently at 4.4% given one large 2007 issuer missed an amortisation payment during the period.

Portfolio Management

The Portfolio, as at 31 March 2014:

·     was split 88.14% USD, 6.85% EUR, 5.01% GBP (excluding Cash)

·     had 2.52% allocated to bonds out of the maximum 20% allowable

·     was invested primarily in B (51.63%) and BB (37.23%) rated investments²

The most material change we have made to the portfolio in the year-to-date period relates to our bond weight. As high yield traded back to 5.2-5.3%, we have significantly reduced our weight, from 8.71% in December to 2.45%. Our exposure to non-US credits and rating profile have remained close to where they ended the year and we do not anticipate any significant changes to those weights for the foreseeable future.

Outlook

We maintain our positive outlook for the loan market, we believe price gains for 2014 will primarily be limited to CCC and D rated issuers, which make up only 8% of the S&P/LSTA Leveraged 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.

Source: BNP Paribas. Data as at 31 March 2014. Past performance is not indicative of future returns.

1.   Source: S&P LCD.

2.   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 asset management firms, managing approximately $242 billion in assets as of December 31, 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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