NSL - NSL: This CEF's Discount Is About To Narrow

Summary

• Nuveen Senior Income Fund is a leveraged loan CEF from the Nuveen family of funds.
• NSL's Board of Trustees has voted on the fund to be merged into its sister fund Nuveen Floating Rate Income Fund.
• The merger is still subject to shareholder approval, but we believe it is going to go through.
• NSL is currently trading with a discount to NAV which is wider than JFR's, and we expect the two to converge.

Thesis

Nuveen Senior Income Fund (NSL) is a leveraged loan CEF from Nuveen. We have covered this fund before here , when we initiated coverage on the name. The fund is now set to be merged into the much larger sister fund Nuveen Floating Rate Income Fund ( JFR ):

NEW YORK, January 19, 2023--(BUSINESS WIRE)--The Boards of Trustees of 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 (NSYE: JFR) have approved a proposal to merge the funds. The proposed mergers, if approved by shareholders, would combine each of NSL, JRO, and JSD into JFR. The mergers are intended to create a larger fund with lower net operating expenses, enhanced earnings potential, and increased trading volume on the exchange for common shares.

The proposed mergers of the funds are subject to certain conditions, including necessary approval by the funds' shareholders. Detailed information on the proposed mergers will be contained in proxy materials with respect to the Annual Meeting of Shareholders expected to be filed in the coming weeks. The mergers are not contingent on each other.

To note that the above decision is solely from the Board of Trustees, and is subject to shareholder approvals. From what we have seen so far in the market though, these sort of corporate actions tend to be pushed through successfully, especially when the funds at hand are very comparable:

Firstly, all of the funds are from the Nuveen family of funds, hence the platform is unilateral here. Secondly, when we look at the above table we can draw a couple of conclusions regarding the names:

• they all have very similar leverage ratios
• while the discounts to NAV vary somewhat, they are within a +/- 3% range
• JFR is by far the largest of the funds

Historically speaking NSL has been a laggard in terms of performance, and its discount to NAV reflects the view that market is taking on this name. We feel the proposed merger is beneficial for NSL's shareholders, and it will result in a narrowing of the premium to NAV, albeit a small one initially.

Premium / Discount to NAV

We can see that historically NSL exhibits one of the widest discounts to NAV from the analyzed cohort:

We have taken all the Nuveen funds subject to the corporate action and plotted them together. We can see that NSL is represented by the orange line in the graph, and the CEF has had the widest discount to NAV in the past year.

Performance

Let us also have a look at the historical performance for the above funds, to see if there are any stand-outs and whether NSL's performance matches its wide discount:

Looking on a 5-year lookback period we can see that indeed the Nuveen Senior Income Fund is the worst performer from the cohort, which indeed justifies its wider discount to NAV. JFR is the second best fund from a total return perspective for the respective period.

What will be interesting to watch as well is how the management teams are going to shake out. When a merger comes to fruition, the acquiring fund management is the one remaining usually. From a performance and size, JFR does justify its position as acquiring fund, so we are betting that the current management team will stay in place there and implement the same vision for the combined asset pool.

Conclusion

NSL is a CEF focused on leveraged loans. The fund comes from the Nuveen family. NSL's Board of Trustees has voted for the fund to be merged into its larger sister fund Nuveen Floating Rate Income Fund. The decision is still subject to shareholder approval, but we do believe it will go through. When looking at the historical performance for the cohort of Nuveen funds set to merge into JFR, we can see that NSL is the worst performing one, justifying its large discount to NAV. In all fairness though, the historic total return is nevertheless tight, with a dispersion of only +/-3%. We feel this corporate action is going to go through and it will result in a tightening of NSL's discount to NAV to match the levels we see in JFR.

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