Stable Distributions Highlight Resilience of First Trust Senior Floating Rate Income Fund II in Volatile Markets

The First Trust Senior Floating Rate Income Fund II (NYSE: FTS) has maintained its consistent distribution strategy, recently declaring a $0.097 per share monthly payout for May 2025. This marks the latest installment in a string of stable distributions, underscoring the fund’s focus on delivering predictable income to investors. However, the announcement also highlights the complexities of investing in senior floating-rate loans—a sector grappling with credit risks, liquidity constraints, and evolving market dynamics.

Distribution Stability Amid Market Challenges

The May distribution aligns with prior 2025 payouts, which have all remained at $0.097 per share. This consistency is intentional: the fund aims to anchor its market price near its Net Asset Value (NAV) by avoiding fluctuating payouts. As of April 17, 2025, the fund’s NAV stood at $10.42, yielding an 11.17% annualized distribution rate. Meanwhile, its closing market price of $9.77 on the same date translated to an 11.91% yield, reflecting a slight discount to NAV.

The fund’s structure prioritizes stability. By maintaining a fixed monthly distribution, FTS seeks to reduce volatility in its share price, which can attract income-seeking investors and mitigate discounts relative to NAV. However, this approach carries risks. The distribution includes a return of capital component, meaning portions of the payout may erode NAV over time—a critical factor for long-term holders.

The Fund’s Strategy: High-Yield Loans with Floating Rates

FTS invests at least 80% of its assets in senior secured floating-rate corporate loans, primarily rated below investment grade. These loans typically offer higher yields to compensate for credit risk, and their floating rates adjust with interest rates—making them attractive in rising-rate environments.

Key Risks to Consider

1. Credit Risk: The fund’s heavy exposure to below-investment-grade debt amplifies default risk. Defaults in sectors like energy or real estate—should economic conditions worsen—could pressure NAV.
2. Liquidity Constraints: Senior loans are often less liquid than traditional bonds, especially during market stress. This could hinder the fund’s ability to sell assets quickly, impacting returns.
3. Leverage Use: While not explicitly detailed, many loan funds employ leverage to amplify returns. This increases volatility and magnifies losses during downturns.
4. Interest Rate Sensitivity: Floating-rate loans reset with benchmark rates (e.g., LIBOR), which could reduce income if rates decline.

Investment Takeaways

• For Income Seekers: The fund’s consistent 11–12% yield makes it a compelling option for those prioritizing steady income, particularly in a low-yield environment.
• For Risk-Averse Investors: The return of capital component and credit risks warrant caution. Diversification into other asset classes (e.g., Treasuries or investment-grade bonds) is advisable.
• Market Timing: The fund’s current 7.5% discount to NAV (based on April 17 prices) could present a buying opportunity if the discount narrows. However, this hinges on the fund’s ability to generate strong returns from its loan portfolio.

Conclusion: A Balanced View

The First Trust Senior Floating Rate Income Fund II’s May distribution reaffirms its commitment to stable payouts, but investors must weigh this against inherent risks. With a historical NAV decline of 13% in 2023 (due to write-downs in key holdings) and ongoing liquidity challenges in senior loans, the fund’s performance hinges on macroeconomic stability and borrower creditworthiness.

For now, the fund’s 11.91% yield on its market price offers a high reward-to-risk ratio—if investors can tolerate potential NAV erosion and sector-specific volatility. Those with a long-term horizon and a tolerance for credit risk may find FTS a viable income-generating tool, but diversification and careful monitoring remain essential.

Final thought: Floating-rate loans thrive in rising-rate environments, but their value wanes when defaults rise. Investors in FTS should stay vigilant on both interest rate trends and corporate credit quality.