Floating Rate Debt Funds
About Floating Rate Debt and Senior Loan Funds
Floating rate debt are commercial loans senior to other loans and debt in a company's capital structure. Floating rate senior loans have an interest rate that resets periodically, are usually secured by specific collateral, and are often rated below investment grade. This means they are subject to a greater risk of default than investment-grade securities. In the event of liquidation, investors in these types of loans are given the highest priority for repayment – before holders of preferred and common stock and subordinated bondholders.
Floating rate debt income typically rises as short-term interest rates rise, as the loans are structured to pay interest based on short term rates plus some additional percentage known as a spread. This means they tend to have low or negative correlation with most bond indexes. Since floating rate funds usually carry lower credit ratings or no credit rating at all, income is expected to be higher in market environments when higher rates are demanded from poor or unrated credits vs. highly rated or government-guaranteed securities ("wide credit spreads").
The types of collateral used to secure floating rate senior loans include:
- Accounts receivable
- Inventory
- Equipment and machinery
- Real estate
Companies typically targeted by portfolio managers may include:
- Hotel/restaurant/entertainment and leisure industries
- Health care providers and services
- Real estate
- Chemical industries
About Nuveen Floating Rate Funds
Nuveen floating rate funds' dividends can act as a possible hedge against rising short-term interest rates and diversification for your overall income portfolio. Nuveen floating rate senior loan funds can help diversify a portfolio and may help to reduce an investor's overall portfolio volatility.
| JFR | Nuveen Floating Rate Income Fund |
| JRO | Nuveen Floating Rate Income Opportunity Fund |
| NSL | Nuveen Senior Income Fund |
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Who Might Be Interested in Floating Rate Debt Closed-End Funds?
The features and investment objectives of these funds might be especially appealing to investors seeking:
- High current income potential
- Additional diversification within their portfolios
- Enhanced capital preservation due to low correlation with other asset classes
What are potential risks of floating rate debt?
- Floating rate funds feature income that rises as short-term interest rates rise. Consequently, if short-term rates fall, the loans’ interest rates also fall, potentially reducing fund income.
- Floating rate loans are generally un-rated and not registered, meaning there is often less public information available about the loans. They are often relatively illiquid.
