Portfolio Update

RNS Number : 4361U

NB Global Floating Rate Income Fund

16 October 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

U.S. loans returned -0.47% for the third quarter of 2014 (July -0.03%, August 0.15%, September -0.60%). The primary driver of the poor performance was a relatively large number of new issue loans being placed at the same time that retail outflows were occurring in both high yield ($20bn)² and loans ($9.4bn).  As at 30 September 2014, year to date returns were 2.11% and the average bid on the S&P/LSTA Leveraged Loan Index had fallen to a 15 month low of 97.5.

The large calendar of new issue loans mentioned above was primarily driven by M&A transactions as the more opportunistic transactions (repricings, refinancings and recapitalisations) reduced given the volatile market conditions and increasing spreads. The supply over the course of the quarter; $85bn of institutional issuance was seen versus $89bn in the same quarter 2013, drove the size of the US loan market to an all-time high of just over $800bn.

Offsetting the retail outflows has been the stronger than expected US CLO issuance which, for the nine months ended 30 September 2014, totalled over $90bn. Projected full year 2014 issuance is $115-125bn.

In Europe, the S&P European Leveraged Loan Index (ELLI) recorded a 1.28% return during the third quarter of 2014, 0.72% without the effects of currency. The year to date total is 4.24% or 2.88% excluding currency which moves performance closer to that of the US.

New institutional issue was reasonable during the quarter at €13bn, increasing the year to date total to €40bn, which exceeds the full year 2013 issuance level already and is the best year since 2007. In line with the US market, European issuance saw an increased weighting towards M&A transactions with a reduction in refinancings, which were down to €2.7bn, their lowest quarterly level since 2012. We did see a slight increase in dividend recapitalisation volume which rose to €2.9bn from €2.1bn in the second quarter.  Repayments were approximately in line with the new issuance levels, therefore the ELLI recorded a fairly constant €104bn outstanding.

The weighted average bid on the ELLI has remained steady, around the 95 level, being supported by the strong CLO bid. We have seen just under €11bn of issuance this year versus €7.4bn for the whole of 2013. We expect the bid level to remain fairly constant as S&P/LCD reports over ten deals in the pipeline.

The general risk off trade that we saw in non-investment grade and the outflows in both the high yield and loan markets had a positive impact on new loan pricing.  New issue clearing yields (a combination of LIBOR/floor, the coupon and issue price) rose and posted their highest quarter end result since the end of 2012 with single B credits averaging 5.5% and BBs 4.2% with individual credits widening between 50 and 100bp.

During the quarter, there were only two defaults in the US for just under $800m of volume. As such, the default rate by number of issuers fell to a 2.5 year low of 0.64%. By volume, the default rate stands at 3.34% or 0.25% if Energy Futures Holdings (fka TXU) is excluded. The benign default environment is in line with our market views and we expect default rates to remain below their long term averages for the next 12-24 months.

The European default rate has increased slightly to 5.4% at the end of quarter three 2014 from 5.1% at the end of June, but is reduced from its August high of 5.8%. Our full year forecast for defaults in Europe at the start of the year was between 2% and 4% but given the default of two of the larger issuers in the ELLI, Vivarte and Autobar in January and April respectively, we expect to end the year around the current level. Without the two issuers referenced, which we do believe are exceptional rather than trend starting, European defaults would be around the 3% level.

Portfolio Management

The Portfolio, as at 30 September 2014:

·     was split 91.44% USD, 4.34% EUR, 4.22% GBP (excluding Cash)

·     had 0.69% allocated to bonds out of the maximum 20% allowable

·     was invested primarily in B (53.36%) and BB (37.67%) rated investments³

Historically, we have increased our weights in high yield bonds as spreads widen, e.g. May/June 2013, and reduced again, taking profits, as spreads tighten. Given the attractive pricing available on loans and our focus on limiting duration in the portfolio, we did not follow this path as spreads widened during quarter three and only increased our weight to bonds from zero in June to 0.7% of the portfolio at the end of September.

Similar to what we reported in the second quarter, we saw the continued divergence of technical conditions between the US and Europe and again took the opportunity to reallocate within a company's capital structure, selling the higher priced European tranche and reinvesting in the cheaper US one. As such, our non US exposure has reduced to 8.6% at the end of the third quarter from 9.8% in June.

Outlook

Our view on the fundamentals of our investable universe is unchanged. Our companies are generally continuing to report decent numbers with steady improvements in profitability, free cash flow and net leverage.

As we have previously mentioned, given this comfort with company fundamentals, we forecasted that the primary driver of loan performance in 2014 would be technicals. We expect the pressures to ease slightly in the coming months as the forward calendar of M&A loans has fallen to $40bn from a post-credit crisis high of $49bn in mid-September. Our full year total return expectation for the asset class remains in the 3-5% range.

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

1.   Source: S&P LCD

2.   Source: JP Morgan; Lipper FMI

3.   Source: Standard & Poor's.

-ENDS-

For further information please contact:

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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