JFR: Merger Completed, Appealing Fund With A 12% Yield

Thesis

The expected merger of Nuveen Senior Income Fund (NSL), Nuveen Floating Rate Income Opportunity Fund (JRO), and Nuveen Short Duration Credit Opportunities Fund (JSD) into Nuveen Floating Rate Income Fund (NYSE:JFR) has been completed. If you were holding any of the funds outside of JFR, you will no longer see those tickers in your brokerage accounts, but rather an amount of JFR shares that represents a NAV for NAV conversion.

We wrote about this merger before here, but now that it has been completed we are actually bullish on JFR. With the Fed now set at higher for longer, floating rate funds like JFR are set to benefit. Especially if we are to enter a ‘new bull’ as many market participants are opining. Furthermore, outside of the fundamental factors which are going to drive performance here, we are also expecting the fund’s discount to NAV to narrow, given the one-stop offering from Nuveen in the floating rate space now. In this article we are going to discuss the impact of the completed merger on the shareholders, and our view on the forward for this CEF.

Merger impact on shareholders

The fund family just announced the successful completion of the merger:

The mergers of Nuveen Senior Income Fund (NSL), Nuveen Floating Rate Income Opportunity Fund (JRO), and Nuveen Short Duration Credit Opportunities Fund (JSD) into Nuveen Floating Rate Income Fund (JFR) were successfully completed prior to the opening of the New York Stock Exchange on July 31, 2023. The fund’s newly consolidated portfolio contains approximately $2 billion in investments-the largest among listed senior loan closed-end funds.

Through the mergers, a wholly-owned subsidiary of JFR acquired approximately all of the assets and liabilities of NSL, JRO, and JSD in tax-free transactions, and common shares of NSL, JRO, and JSD were converted to newly-issued common shares of JFR in an aggregate amount equal to the value of the net assets of NSL, JRO, and JSD. The transactions took place based upon NSL’s, JRO’s, JSD’s, and JFR’s closing net asset values on July 28, 2023. The exchange ratios at which common shares of NSL, JRO, and JSD were converted to common shares of JFR are listed below:

If you were a shareholder in JFR, nothing changes for you. If you were a holder of NSL, JRO or JSD, you should now see JFR shares in your account, in an amount equivalent to the multiplication of the exchange ratio above with the prior amount of shares. The old tickers are now gone, with the old entities now ceasing to exist.

What is the forward for this floating rate CEF?

As detailed above, JFR has now officially become the largest listed senior loan closed-end fund. That is quite important for several reasons. Firstly, coming from the Nuveen family, this fund will become a brand name (smaller funds tend to suffer from brand recognition). Secondly, scale brings about savings via better funding rates on the preferred securities issued as well as the TRS facilities that are used to provide leverage in the facility. These are all great factors that will improve the fund performance over time.

Another non-fundamental factor that will be impacted is the discount to NAV:

The Invesco Senior Income Trust (VVR) and the Apollo Tactical Income Fund (AIF) are two of our favorite leveraged loan CEFs. While AIF is trading with a similar discount as JFR, VVR is much tighter. We expect JFR to follow suit, with a 5% catch-up in its discount to NAV. By virtue of becoming a brand name from a large fund family in the space, the CEF is going to command better stats.

Also important and notable, is the increase in the distribution rate for JFR:

In addition, JFR has declared the following monthly distribution. The distribution represents an increase over the previous month of 14%

The increase in the distribution brings the current 30-day SEC yield for this fund above 12%. That is an extremely attractive number that is going to last for the next 8-9 months at least. When the Fed will eventually start lowering Fed Funds in 2024, the lower rate feature will percolate through with a 1-2 months lag, but that is quite a while in the future. Investors should expect the net investment income here to be high, and the main contributor to the distribution.

It seems the fund is trying to send the right message by passing the operational savings to shareholders directly. Make no mistake – there are numerous savings to be had here via this merger. Firstly all the accountant, trustee and middle office fees are now streamlined under only one umbrella. Furthermore, we suspect the fund will realize savings via cheaper cost of funds in its financing facilities.

Conclusion

JFR is a leveraged loan CEF. The fund has just completed a merger where it has absorbed all the other leveraged loan CEFs from Nuveen. With assets now close to $2 billion, the fund has become one of the largest players in the floating rate CEF space. Existing shareholders in JFR were not impacted by the merger, while NSL, JRO and JSD shareholders have received NAV for NAV shares in JFR. The old tickers are now gone, with the fund structure now consisting of JFR only. We like the merger that creates a one-stop shop for leveraged loans at Nuveen. We believe the fund will see its discount to NAV narrow following this event, and we are already seeing operational synergies passed to shareholders via an increase in the dividend yield. We are a Buyer of JFR here.