Dreyfus High Yield fund may invest up to 10% in floating-rate loans

By Wendy Van Sickle

Columbus, Ohio, Feb. 23 – Dreyfus High Yield Strategies Fund’s board of trustees on Thursday approved permitting the fund to invest up to 10% of its total assets in floating-rate loans, effective March 1, according to a press release.

The investments in floating-rate loans will generally focus on senior secured loans but may include second-lien loans, senior unsecured loans, subordinated loans and fixed-rate loans in which the fund has entered into derivative instruments – mainly swap agreements and options on swap agreements – to effectively convert the fixed-rate interest into floating-rate interest.

The fund may also buy participations and assignments in – and commitments to purchase – floating-rate loans.

Investments in floating-rate loans and securities will generally focus on U.S. issuers, but may include foreign issuers, particularly those located in countries that are members of the Organisation for Economic Co-operation and Development.

Unlike publicly traded common stocks, there is no central market or exchange for loans to trade, the release notes. Rather, loans trade in an over-the-counter market, and confirmation and settlement can take significantly longer than seven days to complete.

The secondary market for floating-rate loans also may experience irregular trading activity and wide bid/ask spreads.

The lack of an active trading market for some floating-rate loans may hinder the fund’s ability to realize full value, and to determine a value, if a floating-rate loan would need to be sold.

Portfolio managers may need to rely mainly on their own evaluation of a borrower's credit quality.

Further, the value of collateral, if any, securing a floating-rate loan can decline and become insufficient to meet the issuer's obligations in the event of non-payment of interest or principal. Collateral can also be difficult to liquidate, and the fund could experience delays or limitations resulting from a borrower’s bankruptcy, the press release notes.

Floating-rate loans in which the fund will typically invest will be below investment grade, putting their risks in line with those of securities rated below investment grade, although senior loans are usually senior and secured unlike other sub-investment-grade securities, which are often subordinated and unsecured.

Floating-rate loans may also be excluded from anti-fraud protections of federal securities laws.

Dreyfus High Yield Strategies Fund is advised by The Dreyfus Corp., a New York-based asset management and distribution company.

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