Today I am going to discuss a closed end fund composed of senior variable rate debt.

music selection: “Poison” — Alice Cooper

weigh-in: 221.8 (0.2) #loser

We go back to Nuveen for another closed end fund.  Nuveen Floating Rate Income Opportunity Fund (JRO) is a CEF composed primarily of senior variable notes.  In the event of bankruptcy, these notes must be paid first before other creditors and bond holders can be compensated.  This adds an extra measure of safety.  The closed end nature ensures shareholders can not force the fund to lock in loss during liquidity events by taking redemptions.  The closed end nature also means we can sometimes buy assets for less than their fair value.  In this case, JRO is trading at a 12% discount to NAV.  A real steal!

The fund pays a monthly distribution of .063 per share.  Against today’s market price, the yield is 7.5%; comparable to the after tax return on our closed end municipal bond funds.  Like the munis, this fund pays monthly allowing more frequent compounding for those still accumulating their retirement bulkhead or more convenient budgeting for those in the draw-down phase.  The variable nature of the debt held by JRO means there is upside for both income and capital gains if the Fed begins raising interest rates.  This is an important defensive measure in the current environment.

JRO is a buy anytime it trades at more than 10% below NAV.  Raptors can track NAV at the Nuveen fund page here.

Devour your prey raptors!

Buy JRO for rising interest rate upside

Never miss another opportunity to devour prey!

4 thoughts on “Buy JRO for rising interest rate upside

  • October 12, 2015 at 5:09 pm
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    While I’m not familiar with JRO, I have found that closed end funds can be especially appealing during panic sell offs. Good job seeking value Raptor. Hunt on!

    -Bryan

    Reply
  • October 12, 2015 at 11:46 pm
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    Presumably the underlying companies must have a low(ish) credit rating to have the fund be yielding so much. An increase in rates (and hence an increase in the interest expense and decrease in the ability to roll over debt) could lead to an increase in defaults. Of course, the senior status offers some protection. I haven’t looked, but do you know the assets of the underlying securities?

    Reply
    • October 13, 2015 at 12:45 am
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      Darren two things: 1) these CEF usually use 30-40% leverage to boost returns [37% fpr JRO]. 2) there is a sweet spot for variable debt where a company is too large for conventional bank financing but too small for Goldman Sachs et.al. to be interested in floating them a bond. These firms typically are forced rely on unconventional sources for variable rate financing at a slightly inflated rate. Some are CEF like JRO and others are Business Development Corporations (BDCs) [another high yield besides MLP and REIT area that is required to distribute cash flow as distributions to qualify for tax exemption]. Either way, yields are attractive in that space.

      If you want to see the underlying securities the top 10 (none larger than 3%) listed here: http://www.nuveen.com/CEF/Product/Holdings.aspx?fundcode=JRO click the View All Holdings link to download a complete list. There are no secrets here.

      Reply

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