An Alternative to Fixed Rate Bonds
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- Clyde Bates
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1 An Alternative to Fixed Rate Bonds Voya Senior Loans Suite offered by Aston Hill Financial Seeks to pay high income in various rate environments One of the world s largest dedicated senior loan teams Five Threeways waystotoinvest investininthis thisexpanding expandingasset assetclass class
2 Aston Hill Financial The Floating Rate Alternative A floating rate loan has the potential to hold its value and pay competitive income whether interest rates rise, fall or stay stable. That s because the loan s interest rate is designed to adjust in tandem with other interest rate changes in the market. a natural hedge against rising rates The yields of floating rate investments, such as senior loans, adjust to changes in interest rates, so when rates rise, the amount of income also rises. The reason for this lies in the unique structure of senior loans: They are ultra-short duration assets, with average interest rate reset periods of 60 days or less. They typically pay at the market rate, so interest rate changes by themselves don t affect their prices. They are made to noninvestment grade businesses, so the rate tends to be higher than other short-term debt instruments. In the current low-interest rate environment, a majority of loans are issued with a LIBOR floor. Loans pay a coupon consisting of two parts a contractual spread plus a market interest rate (typically LIBOR). Loans which are issued with a LIBOR floor demand a minimum level of payment on the market interest rate portion of the coupon. For such loans, even if interest rates begin to rise, the income of the loan will not increase until LIBOR rates rise above the applicable floor. senior loans get paid first Senior loans are made to non-investment grade borrowers, increasing the risk that a borrower might not make payments on time or default on the loan. To offset this risk, senior loans have several important structural characteristics: Senior loans hold the highest rank in a borrower s capital structure, giving them payment priority over all other outstanding debt. Senior loans typically are secured by a first priority lien on the assets of the borrower. In the event of bankruptcy or liquidation, senior loan obligations would typically be paid first. Senior loans impose performance targets and borrower covenants that, if missed, can trigger the right of the lenders to take action. Priority of Repayment in the Event of Default Senior Secured Loans Senior Unsecured Debt Junior Unsecured Debt Preferred Stock Common Stock 1
3 A Depth of Expertise The Voya Senior Loan Group is one of the world s largest teams dedicated to managing senior loans, including the oldest loan mutual fund (established in May 1988). The team s depth and expertise allow it to manage unlike many competitors from the private side of the market. This gives the team the opportunity to base decisions on private corporate data a distinct advantage to investors, especially in volatile markets. the voya team: by the numbers The Voya Senior Loan Group manages over $20 billion in senior loans as of June 30, Voya has a dedicated senior loan team of 28 investment professionals and 27-person support staff, with average industry experience of 14 years. Ongoing analysis, monitoring and underwriting through daily credit and trading meetings, and detailed periodic portfolio reviews. For 14 years, the team s proprietary loan management system has incorporated integrated analytics, trading, compliance and operational support into every trade decision. an investment process driven by meticulous credit research Liquidity Focus Diversification Ongoing Risk Monitoring Consistent Decision Making A focus on senior, secured first-lien loans, emphasizing the more liquid loans in the senior loan asset class. Seeks to limit portfolio exposures to an average of 5% per industry and 0.5% per borrower. Daily monitoring of intrinsic values and internal credit ratings for each asset in the portfolios. The Senior Loan Investment Committee oversees investment decisions made by the team and approves every loan for investment. The Voya Process At Work The Voya Senior Loan Group s process targets interest rates in all interest rate environments. expansion Characterized by: rising interest rates and strong loan demand. Why our process works: Ultra-short duration assets adjust to higher rates. Macro views and fundamental credit analysis create investment deployment into strong sectors and issuers. growth Characterized by: higher interest rates and loan prices. Why our process works: Ultra-short duration assets adjust with higher rates. Private-side management provides access to material information that may help identify strong opportunities. recovery 2003, Characterized by: steady but low interest rates; loan price recovery. Why our process works: Independent credit analysis identifies loans with high relative value and liquidity. Portfolio construction ensures broad diversification. recession , Characterized by: declining interest rates and higher loan price volatility. Why our process works: Higher quality credit bias, rigorous risk management and high levels of diversification contribute to lower default rates and lower credit losses. This example is for illustrative purposes only. It is being shown to demonstrate the Voya Senior Loan Group s investment process only. 2
4 An Alternative to Fixed Rate Bonds An Attractive Alternative When Interest Rates Rise Senior floating rate loans historically have been a valuable complement to fixed income portfolios because of the different way they react to changes in interest rates. In today s environment, ignoring the possibility of higher rates could expose your portfolio to unnecessary risk. rates are well below historical averages With interest rates, such as the U.S. Fed Funds Target Rate, still hovering close to zero an all-time historic low the current rate is well below the historical average. Rates don t have to rise anywhere near the historical average to have a negative impact on most bond prices. federal funds target rates As of 12/31/ historical average Last period of rising rates (see chart below) Current rate is well below the historical average Source: Federal Reserve, Bloomberg, FactSet Note: Interest rates are measured by the Fed Funds Target Rate. Fed Funds Target Rate is the overnight interest rate banks charge each other. Index Disclosures The S&P/LSTA Leveraged Loan TR Index is an unmanaged total return index that captures accrued interest, repayments and market value changes. The Barclays U.S. Aggregate Bond Index is an unmanaged widely recognized index of publicly issued fixed-rate U.S. government, investment grade, mortgage-backed and corporate debt securities. floating rate loans have held their ground in rising rate environments During the last sustained period of rising rates (06/ /2006), the S&P/LSTA Index an index of senior floating rate loans was able to provide steady growth. As a complement to fixed income, senior floating rate loans may help diversify interest rate risk. floating rate vs. fixed rate when rates last rose Cumulative Performance 06/ /2006 performance 12% 17 Rate Increases of % 8% 6% 4% 2% 0% Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 S&P/LSTA Leveraged Loan Index Annualized Barclays Total Returns U.S. Agg Bond (%) Ending Index USD December 31, 2014 Federal Funds Target Rates 1 Year 5 Years 10 Years S&P/LSTA Leveraged Loan TR Index Barclays U.S. Aggregate Bond Index S&P/LSTA Leveraged Loan TR Index Barclays U.S. Aggregate Bond Index Federal Funds Target Rates Source: Morningstar, Inc. Past performance does not guarantee future results. Performance shown is historical and not indicative of any Voya Fund. Index performance does not reflect management fees or expenses associated with investing in mutual funds. Indexes are not actively managed. Investors cannot directly invest in an index. A Potential Inflation Hedge as Well Floating Rate Bank Loans not only adjust to changes in interest rates, they may also adjust to rises in overall prices or inflation. These short-term loans are based on LIBOR, the daily rate in the London money market at which banks borrow from other banks. This rate has a 0.62 correlation to inflation (as measured by CPI) correlation of +1 implies that two securities move in lockstep, 1 implies that they move in the opposite direction of each other. 3
5 An Alternative to Fixed Rate Bonds Five Ways to Invest in Voya s Senior Floating Rate Loan Strategy with Aston Hill meet the voya managers In partnership with Aston Hill Financial, the Voya Senior Loan Group offers five distinct senior loan portfolios to match differing investor needs and preferences. aston hill voya floating rate income fund Open End Fund: See sidebar for FundSERV codes Open-end fund that invests primarily in Senior Loans and may invest up to 20% of its net assets in high yield corporate bonds or other floating rate debt securities. Variable distribution paid monthly. voya floating rate senior loan fund Closed End Fund: TSX: ISL.UN (Class A); ISL.U (Class U) Provides tax-efficient exposure to an actively managed, diversified portfolio of Senior Loans. Current annualized yield of 5.2%; pre-tax interest equivalent yield of 7.4%*. voya diversified floating rate senior loan fund Closed End Fund: TSX: IFL.UN Provides tax-efficient exposure to an actively managed, diversified portfolio consisting primarily of Senior Loans, including loans to middle market companies, as well as second lien senior loans. Current annualized yield of 6.7%; pretax interest equivalent yield of 9.6%*. Dan Norman Co-Portfolio Manager 30 years experience Jeff Bakalar Co-Portfolio Manager 29 years experience Senior loans seek to perform well in most interest rate environments, so they may be a great complement to fixed income investments, particularly in a rising rate environment. dan norman aston hill voya floating rate income fund Series Series A (FE) Series A (LSC) FundSERV Code AHF110 AHF111 voya high income floating rate fund Closed End Fund: TSX: IHL.UN Provides a diversified portfolio of Senior Loans and second lien senior loans to achieve a high income return. Current annualized yield of 7.4%. voya senior loan portfolios do not own: Any mortgage exposure Any exposure in derivative instruments Any structured assets or mezzanine exposure voya global income solutions fund Closed End Fund: TSX: VGI.UN Provides a portfolio that dynamically allocates between Senior Loans and global equities, balancing income, capital growth and capital preservation objectives. Current annualized yield of 5.5%. For more information about these offerings from Aston Hill, contact your Financial Professional or visit astonhill.ca. Annualized yields are for Class A as of June 30, ING Investment Management became Voya Investment Management on May 1, *Pre-tax interest equivalent yield calculated assuming interest income is taxed at 46% and capital gains are taxed at 23%. Series F Series I summary: AHF112 AHF113 Senior Loans seek to pay a relatively high rate of income in all market environments and complement fixed income portfolios because they tend to hold their value when rates rise. Voya has one of the industry s largest dedicated teams, which focuses on diversification, liquidity, and appropriate monitoring and risk management practices at all points in the investment cycle. The team seeks to provide consistent returns in various rate environments. 4
6 investment risks Risk is inherent in all investing. The following are the principal risks associated with investing in senior loans. Credit Risk: Senior loans are below investment grade instruments that carry a higher than normal risk that borrowers may not make timely payments of principal and interest. Failure by borrowers to make such payments may cause the yield and/or the value of an investment in senior loans to decline. Interest Rate Risk: The yield on senior loans is directly affected by changes in market interest rates. If such rates fall, the yield may fall. Also, if overall interest rates on loans decline, the yield may fall and the value of the loans may decrease. When market interest rates rise, there may be a delay in the rise in the yield on loans due to a lag between changes in such rates and the resetting of the floating rates on the loans. There may also be a delay due to the effect of LIBOR floors, which establish a lower limit on the LIBOR portion of a loan s yield. Rises in market interest rates must exceed applicable LIBOR floors before such rises will affect the yield on a loan with a LIBOR floor. Limited secondary market for loans: Loans do not trade on an established exchange. There is a limited secondary market for loans. Demand for loans: An increase in demand for loans may adversely affect the rate of interest payable on new loans, and it may also increase the price of loans in the secondary market. A decrease in the demand for loans may adversely affect the price of loans, which could cause the value of loans to decline. Foreign Borrowers: Investment in foreign borrowers involves special risks, including potentially less rigorous accounting requirements, differing legal systems and potential political, social and economic adversity. Use of Leverage: The use of leverage in a portfolio may have a magnifying effect on the returns for a portfolio, both positively and negatively. Foreign Currency: While the strategy seeks to hedge foreign currency risk to the greatest extent practicable, such hedging may not be effective. The information in this document should be considered as background information only and should not be construed as investment or financial advice. Further, it should not be construed as an offer or solicitation to buy or sell securities. Investors should read the Fund s prospectus and continuous disclosure documents available at or which further describe the risks and fees and expenses associated with an investment in the securities of the Fund and should consult with professional advisors before making investments decisions. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. This is not, and is not intended to be, a description of all risks of investing in senior loans. The applicable offering documents should be read carefully before investing. Other risks of the funds include but are not limited to Diversification Risk and Concentration Risk. All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield inherent in investing. An investor should consider the investment objectives, risks, charges and expenses of the Fund(s) carefully before investing. For a free copy of the Fund s prospectus, or summary prospectus, which contains this and other information, visit us at or call (800) Please read all materials carefully before investing. Voya Investment Management Co. LLC is the subadvisor for the Aston Hill Funds described in this document. Aston Hill is not an affiliate or subsidiary of Voya Investment Management Voya Investments Distributor, LLC. All rights reserved. 230 Park Avenue, New York, NY Aston Hill Financial Inc. 77 King Street West, Suite 2110, Toronto, ON M5K 1G8
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