Attached files
[LOGO OMITTED] First Trust
--------------------------------------------------------------------------------
SENIOR LOAN MARKET UPDATE
--------------------------------------------------------------------------------
Third Quarter 2010
MARKET PERFORMANCE
Senior loans displayed strong performance during the third quarter as fears
surrounding sovereign risks overseas began to abate and corporate defaults
continued their march lower. The improvement was evidenced by the performance of
the S&P/LSTA Index, which was up 3.32% during the quarter, considerably better
than the negative 1.24% generated in the second quarter of 2010. On a
year-to-date basis, the Index is up 6.77% through the end of the third quarter.
In the third quarter, the industries in the S&P/LSTA Index that performed the
best were Financial Intermediaries (+4.88%), Ecological Services and Equipment
(+4.73%) and Cable and Satellite TV (+3.89%). The worst-performing industries
were Forest Products (+1.50%), Beverage & Tobacco (+2.16%) and Conglomerates
(+2.41%).
CREDIT QUALITY
Fundamental credit quality has been improving. This is evidenced by the default
rate which has declined sharply, from a peak of nearly 11% in November of 2008,
to approximately 3.5% at the end of the third quarter. We anticipate that the
default rate will remain low and will likely trend even lower in the quarters
ahead for several reasons. First, the universe of likely defaulting companies
has shrunk as weak issuers in struggling industries have already defaulted. The
second reason is improved corporate performance. For those companies that
publish public financials within the S&P/LSTA Index, EBITDA grew by 15% in the
second quarter. This follows EBITDA* growth of 9.4% in the first quarter, and
15.4% in the fourth quarter of 2009. These improving financial results should
help increase a company's ability to service debt payments. Finally, improved
credit market liquidity has assisted companies in their effort to refinance
near-term maturities. In fact, institutional loan volume, essentially the supply
that feeds the senior loan market, is up nearly fivefold when compared to the
prior year.
PRICE AND SPREAD
The average price in the loan market improved to approximately 91 in the third
quarter. While loan prices have indeed improved significantly from nearly 60 in
late 2008, we believe that the discount to par remains attractive, especially
when coupled with the improved default rate and the improved fundamental
performance for corporations in the leveraged loan universe. In fact, by
historical standards, yields are attractive. According to Standard & Poor's LCD,
the discounted spread to a 3-year average life is currently Libor plus 6.13%.
This compares favorably to the average pre-credit crisis spread of Libor plus
3.63% (period ending June 2007).
PORTFOLIO REVIEW
The First Trust Senior Floating Rate Income Fund II is weighted toward those
industries which we believe should benefit from continued economic stabilization
and corporate credit improvement. Moreover, our rigorous credit process tends to
favor those industries which exhibit greater defensive characteristics, which
should also help insulate the portfolio in the event of a double-dip recession.
The largest industries in the portfolio at the end of the third quarter were
Healthcare: 12.05%; Media: 8.53%; Diversified Consumer Services: 6.85%; and
Chemicals: 6.57%. These industries typically have hard assets (tangible assets
such as property plant and equipment, inventory and account receivables) which
may benefit investors who are senior secured as they can provide for better
recoveries in the event of a default.
The portfolio exhibits a significant quality bias when compared with the
S&P/LSTA Index. Over 70% of the portfolio is rated BB- or better by Standard &
Poor's versus 40% for the index. Moreover, concentrations by both industry and
borrower are well below portfolio limits, reflecting our belief that, after
credit selection, diversification is the best way to guard against loss. The
portfolio remains well diversified with 148 positions and an average position
size of 0.68%. The largest portfolio position was Reynolds Consumer Products
Holdings, Inc. at 1.84% of the portfolio.
OUTLOOK
The story for senior loan investors has been one of continued improvement. As
seasoned managers, we have been working diligently to capitalize on the current
market opportunities by performing rigorous credit research and seeking to
identify what we believe to be excellent risk-adjusted return opportunities.
With loan prices trading below par, defaults trending lower, and credit quality
generally strong, we believe investors with an intermediate time horizon will be
rewarded by investing in the senior loan asset class as current market
conditions appear to offer investors a compelling value.
*Earnings before interest, taxes, depreciation and amortization.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SENIOR LOAN MARKET UPDATE
--------------------------------------------------------------------------------
INVESTMENT MANAGER
------------------
First Trust Advisors L.P. ("First Trust") was established in 1991 and is located
in Wheaton, Illinois. First Trust offers customized portfolio management using
its structured, quantitative approach to security selection. As of November 30,
2010, First Trust managed or supervised $39.65 billion in assets. The First
Trust Leveraged Finance Investment Group began managing the First Trust Senior
Floating Rate Income Fund II (previously called the "First Trust/Four Corners
Senior Floating Rate Income Fund II") on October 13, 2010. The experienced
professionals comprising the First Trust Leveraged Finance Investment Group
currently manage approximately $515 million. The group's experience includes
managing senior secured floating-rate corporate loans in both the U.S. and
Europe, managing high-yield debt and corporate restructuring expertise. The
group has managed institutional separate accounts, commingled funds, structured
products and retail funds.
PORTFOLIO MANAGEMENT TEAM
-------------------------
WILLIAM HOUSEY, CFA - Senior Vice President, Senior Portfolio Manager
Mr. Housey joined First Trust Advisors L.P. in June 2010 as Senior Portfolio
Manager and has nearly 15 years of investment experience. Prior to joining First
Trust Advisors L.P., Mr. Housey served as Executive Director and Co-Portfolio
Manager at Van Kampen Funds, Inc., a wholly-owned subsidiary of Morgan Stanley.
Mr. Housey has extensive experience in portfolio management of both leveraged
and unleveraged credit products, including senior loans, high-yield bonds,
credit derivatives and corporate restructurings. Mr. Housey received a BS in
Finance from Eastern Illinois University and an MBA in Finance as well as
Management and Strategy from Northwestern University's Kellogg School of
Business. He also holds the Chartered Financial Analyst designation.
SCOTT D. FRIES, CFA - Vice President, Portfolio Manager
Mr. Fries joined First Trust Advisors L.P. in June 2010 as Portfolio Manager of
the Leveraged Finance Investment Team and has over 15 years of investment
industry experience. Prior to joining First Trust Advisors L.P., Mr. Fries
served as Co-Portfolio Manager of Institutional Separately Managed Accounts for
Van Kampen Funds, Inc., a wholly-owned subsidiary of Morgan Stanley. Mr. Fries
received a BA in International Business from Illinois Wesleyan University and a
MBA in Finance from DePaul University. He also holds the Chartered Financial
Analyst designation.
INVESTOR RELATIONS
------------------
GREGORY OLSEN, CFA - Senior Vice President, Portfolio Specialist
Mr. Olsen is a Senior Credit Analyst and Portfolio Specialist for the Leveraged
Finance Investment Team at First Trust Advisors. He has 17 years of investment
experience, most recently as Executive Director and Portfolio Specialist in
leveraged finance for Morgan Stanley/Van Kampen. Mr. Olsen received a B.S. in
Business Administration from Illinois Wesleyan University and an MBA with a
concentration in finance from DePaul University. He holds the Chartered
Financial Analyst designation and is a member of the CFA Institute and the CFA
Society of Chicago. His professional experience is concentrated within the
credit markets including senior
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This commentary contains certain forward-looking statements within the meaning
of the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended. Forward-looking statements include statements regarding the
goals, beliefs, plans or current expectations of First Trust Advisors L.P.
("First Trust" or the "Advisor"), taking into account the information currently
available to it. Forward-looking statements include all statements that do not
relate solely to current or historical fact. For example, forward-looking
statements include the use of words such as "anticipate," "estimate," "intend,"
"expect," "believe," "plan," "may," "should," "would" or other words that convey
uncertainty of future events or outcomes.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
First Trust Senior Floating Rate Income Fund II (the "Fund") to be materially
different from any future results, performance or achievements expressed or
implied by the forward-looking statements. When evaluating the information
included in this market update, you are cautioned not to place undue reliance on
these forward-looking statements, which reflect the judgment of the Advisor only
as of the date hereof. Neither the Fund nor the Advisor undertake any obligation
to publicly revise or update these forward-looking statements to reflect events
and circumstances that arise after the date hereof.
PERFORMANCE AND RISK DISCLOSURE
There is no assurance that the Fund will achieve its investment objectives. The
Fund is subject to market risk, which is the possibility that the market values
of securities owned by the Fund will decline and that the value of the Fund
shares may therefore be less than what you paid for them. Accordingly, you can
lose money by investing in the Fund.
Performance data quoted represents past performance, which is no guarantee of
future results, and current performance may be lower or higher than the figures
shown. The Fund is subject to various risks, including: Credit Risk, Senior Loan
Risk, Lower Grade Debt Instruments Risk, Interest Rate Risk, Discount From or
Premium to Net Asset Value Risk, Leverage Risk, Restrictive Covenants and 1940
Act Restrictions, Secondary Market for the Fund's Shares, Limited Secondary
Market for Senior Loans, Lending Portfolio Securities, Demand for Senior Loans,
Unsecured Loans and Subordinated Loans, Short-Term Debt Securities, Investments
in Equity Securities Incidental to Investment in Senior Loans, Illiquid
Securities, Non-U.S. Securities, Management Risk, Strategic Transactions,
Reinvestment Risk, Inflation Risk, Regulatory Changes, Market Event risk,
anti-Takeover Provisions.
Lower grade debt instruments are commonly referred to as "high yield" or "junk
bonds" and are considered speculative with respect to the issuer's capacity to
pay interest and repay principal. Investing in lower grade debt instruments
involves additional risks than investment-grade debt instruments. Lower grade
debt instruments are securities rated Ba1 or lower by Moody's or BB+ or lower by
S&P, comparably rated by another NRSRO or, if unrated, of comparable credit
quality. These lower grade debt instruments may be come the subject of
bankruptcy proceedings or otherwise subsequently default as to the repayment of
principal and/or payment of interest or be downgraded to ratings in the lower
rating categories (Ca or lower by Moody's, CC or lower by S&P or comparably
rated by another NRSRO). Issuers of lower grade debt instruments are not
perceived to be as strong financially as those with higher credit ratings, so
the securities are usually considered speculative investments. These issuers are
generally more vulnerable to financial setbacks and recession than more
creditworthy issuers which may impair their ability to make interest and
principal payments. Lower grade debt instruments tend to be less liquid than
higher grade debt instruments.
[LOGO OMITTED] First Trust For additional information, call
Jeff Margolin, Senior Vice President
www.ftportfolios.comlinex0 and Closed-End Fund Analyst, at 630-915-6784.
--------------------------------------------------------------------------------
