Voya Floating Rate Fund Quarterly Commentary - 1Q23

March 31, 2023
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Actively managed, ultra-short duration floating-rate income strategy that invests primarily in privately syndicated, below investment grade senior secured corporate loans.

Key takeaways

Key Takeaways

Despite the volatility and Silicon Valley Bank (SVB) and regional banking crisis that emerged in March, the US loan market closed 1Q23 on a high note, as the Morningstar® LSTA ® US Leveraged Loan Index (Index) returned 3.23% during the quarter.
The Class I shares of the Fund underperformed the Index in 1Q23 on a net asset value (NAV) basis.
In the short term, we expect leveraged finance markets to remain impacted by myriad of macro developments, evolving the US Federal Reserve policy, inflation and payroll data, fallout from regional banks and tighter financial conditions, and most importantly – corporate fundamental factors, 1Q23 earnings and forward guidance.

Portfolio review

Despite the volatility and SVB and regional banking crisis that emerged in March, the US loan market closed 1Q23 on a high note, as the Morningstar® LSTA ® US Leveraged Loan Index (the Index) returned 3.23% during the quarter. Overall, the average loan Index bid price increased by 94 bp to 93.38, primarily attributable to strong performance in the first two months of the quarter, as well as the last week of the quarter in which some of the earlier March softness was retraced. For the quarter, loans underperformed equities, investment grade and high yield (HY) bonds, as fixed-rate assets generally outperformed given the sharp rally in Treasuries.

Secondary trading levels were volatile in March, driven by the SVB and other bank-related developments but managed to retrace most of the softness towards the end of the quarter as the broader markets recovered post the Fed and Federal Deposit Insurance Corporation intervention. Lower rated-credits outperformed higher rated-credits in 1Q23, as double-B, single-B and CCC rated loans returned 2.08%, 3.81% and 3.92%, respectively.

New-issue supply remained low, given the less conducive macro backdrop for primary deals to launch. Total volume amounted to $49.5 billion during the quarter, the slowest reading for first-quarter issuance in seven years. The size of the loan market, as represented by total Index outstandings, declined by $14.53 billion in the first quarter to $1.4 trillion. On the demand side, collateralized loan obligation issuance remained in high gear, as managers priced $33.6 billion of new deals in 1Q23 which is ahead of last year’s pace of $31.2 billion for the comparable period. On the other hand, retail loan fund investors continued to exit the market, as $10.77 billion was withdrawn from mutual funds and exchange-traded funds during the quarter.

On an NAV basis, Class I shares of the Fund underperformed the Index. By ratings, the Fund’s exposure to the defaulted loan category and selection in D rated loans detracted from relative returns. From an industry perspective, the primary challenge was selection in software sector, although the bulk of the impact was concentrated in one issuer. Additional but smaller sector-level impacts stemmed from selection in IT services sector, as well as independent power and renewable electricity producers. By issuer, the Fund was negatively impacted by overweights to Avaya Inc., Nautilus Power, LLC. and Diamond Sports Group LLC. All three companies experienced challenges related to weak earnings and liquidity challenges. In contrast, the primary benefit resulted from the Fund’s exposure to the Avaya B3 term loan that received favorable treatment as part of the Restructuring Support Agreement (RSA) struck by approximately 90% of Avaya lenders, which was accretive to Fund performance. However, some of the benefit was partially offset by the Fund’s exposure to the respective Avaya B1 and B2 term loans which did not experience the same recovery as the B3 term loan. Elsewhere, the Fund also benefitted from selection in BB rated loans. Contributions by sectors were primarily due to selection in diversified telecommunication services sector, which was driven by an overweight to Telesat Canada. The company experienced some mean-reversion in the performance of its term loan following underperformance last year. Away from loan-level performance, the Fund’s modest exposure to HY bonds had a positive impact on performance, as the HY bond market outperformed in 1Q23 relative to loans (3.57% return for the Bloomberg U.S. Corporate High Yield Index).

Portfolio and positioning changes were both mostly minimal during the period. The number of individual names in the portfolio increased from 356 to 385, while the average spread level of the Fund decreased to 372 bp (versus 386 bp in the prior quarter). Elsewhere, the Fund experienced three defaults during the period (Yak Mat, Avaya and Diamond Sports Group), as compared to 8 defaults in the Index.

Current strategy and outlook

In the short term, we expect leveraged finance markets to remain impacted by myriad of macro developments, evolving Fed policy, inflation and payroll data, fallout from regional banks and tighter financial conditions, and most importantly — corporate fundamental factors, 1Q23 earnings and forward guidance. Loan fundamental factors, while still favorable, are showing signs of deterioration especially across lower-rated issuers. While overall metrics look favorable versus pre-pandemic levels, the market will be acutely focused on the impact of “higher for longer” rates environment (if sustained) and secondary impact from tighter credit conditions (regional banks), both of which will be a key focus during the next round of quarterly earnings. Unsurprisingly, loans have become more heavily correlated to movements in macro sentiment than is typical for the asset class given the recent developments that have impacted broad risk sentiment. As a result, careful credit selection and monitoring continues to be warranted, as risks remain skewed to the downside.

Holdings Detail

Companies mentioned in this report – percentage of Fund investments, as of 3/31/23: Avaya 0.60%, Yak Mat 0.42%, Diamond Sports Group, LLC 0.13%, Nautilus Power 0.69% and Telesat Canada 0.52%; 0% indicates that the security is no longer in the portfolio. Portfolio holdings are subject to change on a daily basis.

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The Morningstar® LSTA ® US Leveraged Loan index is an unmanaged total return index that captures accrued interest, repayments, and market value changes. The index does not reflect fees, brokerage commissions, taxes or other expenses of investing. Investors cannot invest directly in an index.

Principal Risks: All investing involves risks of fluctuating prices and the uncertainties of rates of return and yield. Investment Risks: The Fund invests primarily in below investment grade, floating rate senior loans (also known as “high yield” or “junk” instruments), which are subject to greater levels of liquidity, credit, and other risks than are investment grade instruments. There is a limited secondary market for floating rate loans, which may limit the Fund’s ability to sell a loan in a timely fashion or at a favorable price. If a loan is illiquid, the value of the loan may be negatively impacted and the manager may not be able to sell the loan in order to meet redemption needs or other portfolio cash requirements. The value of loans in the Fund could be negatively impacted by adverse economic or market conditions and by the failure of borrowers to repay principal or interest. A decrease in demand for loans may adversely affect the value of the Fund’s investments, causing the Fund’s net asset value to fall. Because of the limited market for floating rate senior loans, it may be difficult to value loans in the Fund on a daily basis. The actual price the Fund receives upon the sale of a loan could differ significantly from the value assigned to it in the Fund. The Fund may invest in foreign instruments, which may present increased market, liquidity, currency, interest rate, political, information, and other risks. These risks may be greater in the case of emerging market loans. Although interest rates for floating rate senior loans typically reset periodically, changes in market interest rates may impact the valuation of loans in the portfolio. In the case of early prepayment of loans in the Fund, the Fund may realize proceeds from the repayment that are less than the valuation assigned to the loan by the Fund. In the case of extensions of payment periods by borrowers on loans in the Fund, the valuation of the loans may be reduced. The Fund may also invest in other investment companies and will pay a proportional share of the expenses of the other investment company. Derivative Instruments: Derivative instruments are subject to a number of risks, including the risk of changes in the market price of the underlying securities, credit risk with respect to the counterparty, risk of loss due to changes in interest rates and liquidity risk. The use of certain derivatives may also have a leveraging effect which may increase the volatility of the Fund and reduce its returns. Other investment risks of the Fund include, but are not limited to: Equity Securities, Foreign Investments, High-Yield Securities, Leverage, Liquidity, Prepayment and Extension. Investors should consult the Fund’s prospectus and statement of additional information for a more detailed discussion of the Fund’s risks. An investment in the Fund is not a bank deposit and is not insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board or any other government agency.

This commentary has been prepared by Voya Investment Management for informational purposes. Nothing contained herein should be construed as (i) an offer to sell or solicitation of an offer to buy any security or (ii) a recommendation as to the advisability of investing in, purchasing or selling any security. Any opinions expressed herein reflect our judgment and are subject to change. Certain of the statements contained herein are statements of future expectations and other forward-looking statements that are based on management’s current views and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Actual results, performance or events may differ materially from those in such statements due to, without limitation, (1) general economic conditions, (2) performance of financial markets, (3) interest rate levels, (4) increasing levels of loan defaults (5) changes in laws and regulations and (6) changes in the policies of governments and/or regulatory authorities. Past performance is no guarantee of future results.

The opinions, views and information expressed in this commentary regarding holdings are subject to change without notice. The information provided regarding holdings is not a recommendation to buy or sell any security. Portfolio holdings are fluid and are subject to daily change based on market conditions and other factors.

The Fund discussed may be available to you as part of your employer sponsored retirement plan. There may be additional plan level fees resulting in personal performance to vary from stated performance. Please call your benefits office for more information.

Performance Attribution: During the period from January 1, 2017 to July 31, 2020, an unaffiliated data provider, which is used by the Funds to identify individual senior loans and groups of senior loans that detracted from or contributed to portfolio performance on an absolute or relative basis (commonly known as “attribution analysis”), provided the Funds with inaccurate data. As a result, the attribution analysis used to explain and analyze a portfolio’s performance against a particular benchmark was inaccurate in some instances during the period. Importantly, the Funds’ actual performance information and performance comparison to their respective benchmark which appeared in various Fund commentaries during this period were correct and were not impacted by the inaccurate data. The data provider has identified and corrected the issue that caused the transmission of inaccurate information, and correct information is reflected in attribution analysis used in commentaries prepared after September 30, 2020.performance. Please call your benefits office for more information.

The Standard & Poor’s rating scale is as follows, from excellent (high grade) to poor (including default): AAA to D, with intermediate ratings offered at each level between AA and CCC. Anything lower than a BBB- rating is considered a non-investment grade or junk bond. Any security that is not rated by Standard & Poor’s is placed in the NR (Not Rated) category.