The board of NBLS is proposing a radical overhaul of the fund’s strategy which would see its mandate widened extensively in order to generate a high monthly income. In order to reflect the new mandate, the name of the fund would be changed to Neuberger Berman Global Monthly High Income Fund.
NBLS currently exclusively invests in floating-rate loans. Under the proposals the investment mandate would broaden to also include conventional fixed income (both investment grade and high yield), as well as CLOs, mezzanine debt and even private corporate loans arranged exclusively for Neuberger Berman via its extensive industry contacts. By investing in more esoteric segments of the fixed-income markets typically available mainly to institutional investors, the intention is to harvest the illiquidity premium to generate 150 to 200 more basis points of yield than that available on NBLS’s current portfolio – i.e. a gross yield of c. 6.6% at current levels.
NBLS would pay a monthly dividend under the proposals, with a target distribution set by the board at the start of each year based on its outlook for rates. The monthly distributions would start in October, with the first target set in January. It is expected to take four months to fully invest the less liquid alternative allocations.
Current shareholders will be offered a cash exit for up to 40% of their shares in a redemption offer as an alternative to participating in the new structure. An enhanced discount-management policy would see a tender offer of 25% at a 2% discount to NAV twice yearly. Should NBLS’s NAV fall below £150m as a result, wind-up proposals will be put forward.
The board’s proposals for NBLS would create one of the most flexible fixed-income offerings on the market. In our view the Neuberger Berman Global Monthly High Income Fund would be a true strategic-bond fund which would use the advantages of the closed-ended structure to reach into esoteric and illiquid areas of the fixed-income market. We think only a group with the size and reach of Neuberger Berman would be capable of offering such a product, which allows the managers to cherry-pick from a global marketplace of credits and even participate in private loan deals. These can offer highly attractive yields relative to those available in the public markets.
With the rates environment likely to be low for some time to come, we think the flexibility is particularly attractive. Some investors might prefer a more defined dividend target, but we think the planned flexible approach and annual review is sensible. At the same time, tightening spreads could see the managers forced to take more credit risk or more liquidity risk, both of which bring their own dangers.
We also think it worth noting the discount-management plans. A 25% biannual tender offer should reduce discount risk and also, coupled with the intention to wind up if NAV falls below £150m, should reassure investors that they will be able to exit their investment close to NAV in future.
|Attractive yield potentially on offer, given low-interest-rate environment
||Low-growth and low-rate environment means absolute yields could fall in coming months
|Deep resources across the fixed-income teams should give advantage in such a broad and flexible mandate
||Hedging costs can vary depending on interest-rate differentials
|Would offer access to sectors rarely available to the retail market
||To generate high yield would need to take credit risk which brings economic sensitivity