Nuveen Senior Loan CEFs To Merge (NYSE:JFR)

On June 23, 2023, Nuveen announced the approval by shareholders of the merger of its senior loan funds: Nuveen Senior Income Fund (NYSE:NSL), Nuveen Floating Rate Income Opportunity Fund (NYSE:JRO), Nuveen Short Duration Credit Opportunities Fund (NYSE:JSD), and Nuveen Floating Rate Income Fund (NYSE:JFR). From the press release:

June 23, 2023 | Nuveen Senior Loan Closed-End Funds Announce Shareholder Approval of Proposed Mergers. Common and preferred shareholders of NSL, JRO, and JSD into JFR have approved a proposal to merge the funds. The mergers will combine each of NSL, JRO, and JSD into JFR. Subject to the satisfaction of certain customary closing conditions, the mergers are expected to become effective before the market opens on July 31, 2023. Leading up to the mergers, NSL, JRO, JSD, and JFR are expected to follow their normal distribution schedules. Following the mergers, JFR is expected to declare its regular August distribution on July 31, 2023, with a record date of August 15, 2023, payable September 1, 2023. (initial merger proposal)

In their proxy materials, Nuveen presented a number of factors to support their argument for a merger, including greater liquidity, potential for narrower discount, increased portfolio size, and lower expense ratio:

Q. Why has each Fund’s Board recommended the Merger proposals?

A. Nuveen Fund Advisors, LLC (“Nuveen Fund Advisors”), a subsidiary of Nuveen, LLC (“Nuveen”) and the Funds’ investment adviser, recommended the Merger proposals as part of an ongoing initiative to streamline Nuveen’s closed-end funds line-up and eliminate overlapping products. Each Fund’s Board considered its Fund’s Merger(s) and determined that the Merger(s) would be in the best interests of its Fund. Based on information provided by Nuveen Fund Advisors, each Target Fund’s Board believes that its Fund’s proposed Merger may benefit the common shareholders of its Fund in a number of ways, including, among other things:

• Greater secondary market liquidity and improved secondary market trading for common shares as a result of the combined fund’s greater share volume, which may lead to narrower bid-ask spreads and smaller trade-to-trade price movements;
• The potential for a narrower trading discount as a result of the larger size of the combined fund and the Acquiring Fund’s common shares trading at a discount that historically has been approximately equal to or lower than that of the Target Funds’ common shares;
• Increased portfolio and leverage management flexibility due to the significantly larger asset base of the combined fund; and
• Assuming that each merger is completed, lower net operating expenses (excluding the cost of leverage), as certain fixed costs are spread over the combined fund’s larger asset base which may also help to achieve fund-level management fee breakpoints (please see “Proposal No. 1-A. Synopsis-Comparative Expense Information” for more information).

The proxy documents indicate that the management fees of the combined fund would be estimated to be 1.21%, which is around 5-6 bps lower than the management fees for the individual funds. Although this is a benefit to investors, it is an extremely slim difference.

Another of Nuveen’s claims was that the combined fund would potentially exhibit a narrower discount because the acquiring fund’s discount was historically equal or narrower than those of the acquired funds. We can also see that this is a rather generous interpretation as the funds’ discounts have moved nearly in lockstep over the last 10 years.

It’s true however that the fund’s do have highly overlapping investment mandates, with their total returns over 10 years differing by under 5% cumulatively with very similar NAV profiles. Thanks to the positive effects of leverage, the funds have also outperformed the benchmark ETF Invesco Senior Loan ETF (BKLN) over this time frame.

Could the merger have been an attempt to ward off activist activity? As shown in our handy Corporate Actions Tracker tool for members, the combined fund would reach more than $1 billion in assets, making it more difficult for activists to accumulate a significant stake in the combined fund.

However, it doesn’t look like any of the four funds are currently under attack by activist right now. The smallest fund, JSD at $134 million AUM, does count Bulldog and Saba Capital as its top 5 institutional holders, but they each own relatively small (~3%) stakes in the fund. Nevertheless, the merger could still be a prophylactic attempt by Nuveen to preemptively ward of activist activity.

Going forward

The merger is expected to close on July 31, 2023. For those already holding NSL, JFR, JRO or JSD, and who are happy to continue receiving exposure to a Nuveen managed preferred CEF, no action is required, and you will end up holding shares of JFR after the merger.

Depending on the discounts of the funds, there may be arbitrage opportunities available as well. As shown in the table above, the discounts of the funds are very close, differing by under 0.20%. This means that there’s not a significant arbitrage potential available from buying and selling any of these funds. However, should one of the fund’s discounts deviate significantly (>2%) from the others, that would be an opportunity to rotate from the most expensive CEF to the cheapest CEF, as we would expect the valuation difference to revert back as the merger date approaches.