MERRILL LYNCH
SENIOR FLOATING
RATE FUND II, INC.
FUND LOGO
Annual Report
August 31, 1999
Officers and Directors
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Charles C. Reilly, Director
Kevin A. Ryan, Director
Richard R. West, Director
Arthur Zeikel, Director
Joseph T. Monagle Jr., Senior Vice
President
Richard C. Kilbride, Vice President
Gilles Marchand, Vice President
Paul Travers, Vice President
Donald C. Burke, Vice President and
Treasurer
Patrick D. Sweeney, Secretary
Custodian
The Bank of New York
90 Washington Street
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
This report, including the financial information herein, is
transmitted to the shareholders of Merrill Lynch Senior Floating
Rate Fund II, Inc. for their information. It is not a prospectus,
circular or representation intended for use in the purchase of
shares of the Fund or any securities mentioned in this report. Past
performance results shown in this report should not be considered a
representation of future performance. The Fund has the ability to
leverage its Common Stock to provide Common Stock shareholders with
a potentially higher rate of return. Leverage creates risk for
Common Stock shareholders, including the likelihood of greater
volatility of net asset value and market price of Common Stock
shares, and the risk that fluctuations in short-term interest rates
may reduce the Common Stock's yield. Statements and other
information herein are as dated and are subject to change.
Merrill Lynch
Senior Floating
Rate Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
Merrill Lynch Senior Floating Rate Fund II, Inc.
DEAR SHAREHOLDER
We are pleased to provide you with this first annual report for
Merrill Lynch Senior Floating Rate Fund II, Inc. The Fund's
investment objective is to seek to provide as high a level of
current income and such preservation of capital as is consistent
with investing primarily in senior collateralized corporate loans.
The securities are rated in the lower rating categories of the
established rating services, or unrated corporate loans of
comparable quality. The leveraged bank loans in which the Fund
primarily invests are senior secured obligations that offer
investors greater principal protection than unsecured debt
obligations. In addition, these bank loans are floating rate
investments whose principal value generally does not move conversely
with interest rate fluctuations, as is the case with fixed-income
securities.
Fund Performance
Since inception (March 26, 1999) through August 31, 1999, the Fund's
total investment return was +3.02%, based on a change in per share
net asset value from $10.00 to $10.01, and assuming reinvestment of
$0.272 per share income dividends. During the same period, the Fund
earned $0.289 per share income dividends, representing a net
annualized yield of 6.62%, based on a period-end per share net asset
value of $10.01.
Market Review
Late in the summer of 1998, the high-yield bond market was pressured
by disruptions in the equity and emerging markets, which resulted in
a marked decrease in liquidity and, in turn, a decrease in prices in
all three markets virtually across the board. These events negatively
impacted the leveraged bank loan market as well.
After a brief period in early 1999 when the high-yield bond and bank
loan markets had begun to stabilize, a combination of rising
interest rates and widening credit spreads (that is, the spread over
a risk-free investment that an investor requires to invest in high-
yield bonds or leveraged loans) pushed the price of existing high-
yield bond issues and bank loans (which were issued at narrower
spreads) down. In addition, certain sectors experienced extreme
difficulties.
During the three-month period ended August 31, 1999, the interest
rate environment dominated the US capital markets. Investors were
concerned that the ongoing strength in the economy would prompt the
Federal Reserve Board into a round of increasing of the Federal
Funds rate. At the end of June, there was relief when the Federal
Reserve Board only raised interest rates by 25 basis points (0.25%).
However, there were continued signs of strength in the economy, and
the Federal Reserve Board raised short-term interest rates another
0.25% on August 24, 1999.
Correlation Between Markets
There is a growing correlation between the leveraged loan market and
the high-yield bond market. This correlation can be explained by the
fact that high-yield bond and bank loan markets are comprised of
similar industry sectors and often contain overlapping issuers. As a
result, general economic events and trends tend to move the two
markets in the same direction, although the bonds typically move to
a greater degree than the bank loans.
In fact, an analysis by Donaldson, Lufkin and Jenrette suggests that
the correlation is approximately 25% and that over time the loan
market has produced 80% of the return of the high-yield bond market
with only 30% of the volatility. That same study suggests that the
leveraged loan market has virtually no correlation to any other
major asset class (equities, investment-grade corporate bonds,
government securities or emerging market bonds), thus providing
investors with an attractive investment diversification alternative.
The "Risk/Reward of Various Assets" graph that appears on page 2 of
this report to shareholders plots the annualized return and
volatility experienced by several asset classes averaged over the
last seven years, eight months. Asset classes resting on the line
experienced a proportionate amount of return for the corresponding
amount of risk. Asset classes falling below the capital markets line
endured a disproportionate amount of risk relative to the return
they achieved. Finally, asset classes lying above the line achieved
higher returns than justified by the risk they experienced.
Leveraged bank loans are the only asset class to fall significantly
above the line, which illustrates that, compared to other asset
classes, the bank loan market provides superior risk/reward
characteristics. For these reasons, we are optimistic about the
Fund's investment potential.
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
Investment Strategy
Merrill Lynch Senior Floating Rate Fund II, Inc. ended the period
with approximately $198.9 million out of $230.2 million, or 86%, of
its total assets committed for investment in corporate loans. Assets
not invested in corporate loans were invested in high-quality, short-
term securities. As of August 31, 1999, more than 98% of the Fund's
investments in corporate loans were accruing interest at a yield
spread above the London Interbank Offered Rate (LIBOR), the rate
that major banks charge each other for US dollar-denominated
deposits outside of the United States. LIBOR tracks very closely
with other short-term interest rates, such as the Federal Funds
rate. Since the reset period on the Fund's floating rate investments
is between 30 days and 90 days, the yield on the bank loan portion
of the Fund is likely to move in the same direction within a short
period of time after any change in the Federal Funds rate.
Throughout the five months ended August 31, 1999, the Fund's
investment philosophy remained unchanged: to invest in leveraged
transactions in which borrowers have strong market shares,
experienced managements, consistent cash flows and appropriate
risk/reward characteristics in the form of its floating rate spreads
over LIBOR. In addition, we look for companies with significant
underlying asset and franchise value, strong capital structures and
equity sponsors that support their investments. It is these
characteristics that we believe provide optimal downside protection
to the Fund's net asset value.
A line graph depicting the annualized return and volatility for
various assets from 1992 to July 1999.
Volatility Return
Broad Equity Market 14.68% 19.94%
Emerging Market Bonds 20.61% 14.08%
High Yield Bonds 5.78% 10.56%
Leveraged Loans 1.92% 8.44%
U.S. Long-Term Treasury Bonds 9.17% 8.81%
Investment Grade Bonds 5.13% 7.73%
U.S. Intermediate Treasury Bonds 4.81% 6.25%
Mortgage Secs 3.27% 6.85%
Money Market Secs .30% 4.46%
U.S. Inflation .56% 2.57%
Source: Calculated by Merrill Lynch using information and data
presented in Ibbotson Investment Analysis Software, c1999 Ibbotson
Associates, Inc. All rights reserved. Used with permission.
The assets used in the above analysis are represented by the
following indexes: US 30-day Treasury Bill Index (Money Market
Securities); Merrill Lynch Mortgage Index (Mortgage Securities);
Ibbotson's U.S. IT (Intermediate Treasuries); Ibbotson's U.S.
LTIndex (Long-Term Treasuries); Merrill Lynch Corporate Index
(Investment Grade Bonds); Donaldson, Lufkin & Jenrette HY Index
(High Yield Bonds); Donaldson, Lufkin & Jenrette Leveraged Loan Index
(Leveraged Loans); EMBI Fixed Rate Index (Emerging Market Bonds);
and Standard & Poor's 500 Index (Broad Equity Market).
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
During the three months ended August 31, 1999, we focused on the new-
issue market. These new issues were clearing the market at spreads
higher than those required by investors earlier in the year. The new-
issue transactions were also much more conservatively structured,
with lower leverage and higher interest coverage as investors became
more demanding. Some of these leveraged bank loans recently brought
to market are trading above issue price.
The Fund's investments were spread across 60 borrowers in 30
industries. See the "Portfolio Information" section on page 4 of
this report to shareholders, which provides listings of the Fund's
ten largest holdings and five largest industries at August 31, 1999.
In Conclusion
As difficult as the fiscal year was for the high-yield bond and
leveraged loan markets, the Fund's performance illustrates the bank
loan market's ability to weather market fluctuations with less
volatility than the high-yield bond market. This attribute continues
to draw many new institutional buyers to the bank loan market. When
there was almost no liquidity in high-yield securities during the
most difficult periods of the past 12 months and many markets lost
their ability to price transactions, the bank loan market maintained
liquidity for most generally syndicated transactions, although at
lower levels. We believe that both the technical and fundamental
aspects are improving in the bank loan sector. We also believe we
have positively positioned the Fund to follow further expected
improvements in the marketplace in an effort to seek to enhance
performance over the coming months.
We thank you for your investment in Merrill Lynch Senior Floating
Rate Fund II, Inc., and we look forward to reviewing our outlook and
strategy with you again in our next report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Richard C. Kilbride)
Richard C. Kilbride
Vice President and Co-Portfolio Manager
(Gilles Marchand)
Gilles Marchand
Vice President and Co-Portfolio Manager
(Paul Travers)
Paul Travers
Vice President and Co-Portfolio Manager
October 14, 1999
We are pleased to announce that Richard C. Kilbride, Paul Travers
and Gilles Marchand have each been appointed Vice President and
Portfolio Manager of Merrill Lynch Senior Floating Rate Fund II,
Inc. Mr. Kilbride has almost 20 years experience in the fixed-income
markets and has previously served as a Managing Director of Fixed
Income for Merrill Lynch Asset Management, L.P. (MLAM) and its
affiliated asset management companies in London and in Los Angeles.
Mr. Travers joined MLAM's Bank Loan Portfolio Group last year,
bringing with him 15 years of diversified professional experience in
the bank loan industry. He was previously Head of U.S. Corporate
Banking in the New York branch of BHF-BANK. Mr. Marchand has been a
Bank Loan Credit Analyst for MLAM for the last three years and has
almost 10 years buy side experience in a wide range of fixed-income
securities.
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
THE BENEFITS AND RISKS OF LEVERAGING
Merrill Lynch Senior Floating Rate Fund II, Inc. (the "Fund") has
the ability to utilize leverage through the borrowings or issuance
of short-term debt securities or shares of Preferred Stock. The
concept of leveraging is based on the premise that the cost of
assets to be obtained from leverage will be based on short-term
interest rates, which normally will be lower than the return earned
by the Fund on its longer-term portfolio investments. Since the
total assets of the Fund (including the assets obtained from
leverage) are invested in higher-yielding portfolio investments, the
Fund's Common Stock shareholders are the beneficiaries of the
incremental yield. Should the differential between the underlying
interest rates narrow, the incremental yield "pick up" will be
reduced. Furthermore, if long-term interest rates rise, the Common
Stock's net asset value will reflect the full decline in the entire
portfolio holdings resulting therefrom since the assets obtained
from leverage do not fluctuate.
Leverage creates risks for holders of Common Stock including the
likelihood of greater net asset value and market price volatility.
In addition, there is the risk that fluctuations in interest rates
on borrowings (or in the dividend rates on any Preferred Stock, if
the Fund were to issue the Preferred Stock) may reduce the Common
Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage
exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from
the securities purchased is not sufficient to cover the cost of
leverage, the Fund's net income will be less than if leverage had
not been used, and therefore the amount available for distribution
to Common Stock shareholders will be reduced. In this case, the Fund
may nevertheless decide to maintain its leveraged position in order
to avoid capital losses on securities purchased with leverage.
However, the Fund will not generally utilize leverage if it
anticipates that its leveraged capital structure would result in a
lower rate of return for its Common Stock than would be obtained if
the Common Stock were unleveraged for any significant amount of
time.
PORTFOLIO INFORMATION
As of August 31, 1999
Quality Rating* Percent of
S&P/Moody's Long-Term Investments
BBB/Baa 2.5%
BB/Ba 48.9
B/B 26.3
NR (Not Rated) 22.3
[FN]
*In cases where bonds are rated differently by Standard & Poor's
Corp. and Moody's Investors Service, Inc., bonds are categorized
according to the higher of the two ratings.
Percent of
Five Largest Industries Total Assets
Wireless Telecommunications 9.7%
Cable Television Services 6.9
Electronics/Electrical Components 6.8
Chemicals 6.5
Automotive Equipment 6.4
Percent of
Ten Largest Holdings Total Assets
Huntsman ICI Chemicals LLC 4.4%
Bridge Information 3.3
Classic Cable Inc. 2.6
Wyndham International, Inc. 2.6
Omnipoint Communications Corp. 2.6
SPX Corporation 2.2
Mueller Industries Inc. 2.2
Lyondell Petrochemical Co. 2.2
TW Fanch-One Co. 2.2
Starwood Hotels & Resorts Trust 2.2
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
S&P Moody's Face Senior Secured Value
Industries Rating Rating Amount Floating Rate Loan Interests* Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Aircraft & B+ Ba3 $ 875,141 Fairchild Semiconductors Corp., Term, due
Parts--0.4% 4/30/2006 $ 873,458 $ 877,876
Amusement NR++ NR++ 5,000,000 SFX Entertainment Inc., Term B, due
Recreational 6/30/2006 4,968,794 4,965,625
Services--2.2%
Automotive B+ Ba3 2,750,000 Accuride Corp., Term C, due 1/21/2007 2,743,370 2,749,175
Equipment--6.4% NR++ NR++ 500,000 Americanbump, Term B, due 10/31/2002 498,832 500,469
Collins & Aikman Corp.:
BB- Ba3 2,460,000 Term B, due 6/30/2005 2,466,150 2,448,212
BB- Ba3 1,500,000 Term C, due 12/31/2005 1,496,378 1,495,312
Mueller Industries Inc.:
NR++ NR++ 2,500,000 Term B, due 8/16/2006 2,496,879 2,504,687
NR++ NR++ 2,500,000 Term C, due 8/16/2007 2,496,879 2,504,687
Safelite Glass Corp.:
BB- B1 1,250,000 Term B, due 12/23/2003 1,250,000 1,243,750
BB- B1 1,250,000 Term C, due 12/23/2004 1,250,000 1,243,750
-------------- --------------
14,698,488 14,690,042
Broadcasting NR++ NR++ 4,000,000 Benedek Broadcasting, Term B, due 11/20/2007 3,994,099 3,995,000
Radio & Chancellor Media Corp.:
Television--4.1% BB- Ba1 1,061,798 Revolving Credit, due 1/31/2003 1,061,797 1,045,871
BB- Ba1 444,965 Term, due 6/26/2004 426,732 443,760
Cumulus Media:
NR++ B1 1,800,000 Term B, due 9/30/2007 1,795,500 1,795,500
NR++ B1 1,200,000 Term C, due 2/28/2008 1,197,000 1,197,000
NR++ NR++ 1,000,000 Quoram Broadcasting, Term B, due 9/30/2007 997,571 1,001,250
-------------- --------------
9,472,699 9,478,381
Building NR++ B1 2,400,000 Juno Lighting Inc., Term B, due 6/29/2006 2,394,105 2,403,000
Materials--1.9% NR++ B1 2,000,000 Trussway Industries, Term B, due 7/08/2005 1,990,148 2,000,000
-------------- --------------
4,384,253 4,403,000
Business NR++ NR++ 3,000,000 Muzak Audio, Term B, due 12/31/2006 2,992,594 3,007,500
Services--1.3%
Cable BB- Ba1 5,000,000 Charter Communications, Term B, due
Television 3/18/2008 5,000,000 4,993,125
Services--7.0% BB- B1 6,000,000 Classic Cable Inc., Term B, due 1/31/2008 5,992,554 5,996,250
NR++ NR++ 5,000,000 TW Fanch-One Co., Term B, due 12/31/2007 5,031,250 5,006,250
-------------- --------------
16,023,804 15,995,625
Chemicals--6.6% Huntsman ICI Chemicals LLC:
NR++ Ba3 5,000,000 Term B, due 6/30/2007 4,972,744 5,016,665
NR++ Ba3 5,000,000 Term C, due 6/30/2008 4,972,705 5,016,665
NR++ Ba3 4,987,500 Lyondell Petrochemical Co., Term E, due
5/17/2006 4,981,447 5,007,241
-------------- --------------
14,926,896 15,040,571
Computer Bridge Information:
Related NR++ NR++ 2,500,000 Term, due 7/07/2003 2,498,780 2,489,845
Products--3.3% NR++ NR++ 5,000,000 Term B, due 5/29/2005 5,008,769 5,003,126
-------------- --------------
7,507,549 7,492,971
Diversified BB Ba3 4,987,437 SPX Corporation, Term B, due 9/30/2006 5,024,843 5,018,609
- --2.2%
</TABLE>
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Senior Secured Value
Industries Rating Rating Amount Floating Rate Loan Interests* Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Drilling--1.7% Key Energy Services Inc.:
NR++ B1 $2,100,000 Revolving Credit, due 9/14/2003 $ 2,100,000 $ 2,026,500
B- B1 2,000,000 Term B, due 9/14/2004 1,975,641 1,985,000
-------------- --------------
4,075,641 4,011,500
Drug/ B+ B1 2,462,500 Duane Reade Co., Term B, due 2/15/2005 2,458,111 2,463,012
Proprietary
Stores--1.1%
Electronics/ B+ B1 1,996,000 DD Inc. Term B, due 4/22/2005 1,967,966 1,916,160
Electrical NR++ NR++ 3,000,000 Intersil Corp., Term B, due 6/30/2005 2,988,815 3,000,000
Components Semiconductor:
- --6.9% BB- Ba3 1,444,444 Term B, due 8/04/2005 1,440,867 1,442,188
BB- Ba3 1,555,556 Term C, due 8/04/2007 1,551,691 1,553,126
B+ Ba3 4,839,175 Superior Telecom, Term A, due 5/27/2004 4,839,175 4,839,930
B+ B2 3,000,000 ViaSystems Inc., Term C, due 6/30/2005 2,977,704 2,988,750
-------------- --------------
15,766,218 15,740,154
Energy--0.2% NR++ NR++ 500,000 Plains Scurlock, Term B, due 5/12/2004 497,571 498,906
Environmental URS Corporation:
Services--0.9% BB Ba3 1,000,000 Term B, due 6/09/2006 999,018 1,005,000
BB Ba3 1,000,000 Term C, due 6/09/2007 999,014 1,005,000
-------------- --------------
1,998,032 2,010,000
Food & Kindred Specialty Foods, Inc.:
Products--0.9% NR++ B3 734,114 Revolving Credit, due 1/31/2000 731,783 732,738
NR++ B3 1,259,365 Term, due 1/31/2000 1,255,358 1,257,003
-------------- --------------
1,987,141 1,989,741
Grocery--1.7% B B2 4,000,000 Grand Union Co., Term, due 8/17/2003 4,007,500 3,990,000
Hotels & NR++ Ba1 5,000,000 Starwood Hotels & Resorts Trust, Term, due
Motels--4.8% 2/23/2003 5,000,000 5,001,040
Wyndam International, Inc.:
B+ B3 2,000,000 Term, due 6/30/2004 1,990,271 1,988,126
B+ B3 4,000,000 Term, due 6/30/2006 3,990,175 3,979,376
-------------- --------------
10,980,446 10,968,542
Leasing & BB- B1 2,000,000 Anthony Crane, Term, due 7/30/2006 1,995,025 1,980,000
Rental Avis Rent A Car Inc.:
Services--4.3% BB+ Ba3 2,500,000 Term B, due 6/30/2006 2,493,861 2,481,250
BB+ B3 2,500,000 Term C, due 6/30/2007 2,493,842 2,482,813
NR++ Ba3 3,000,000 Nationsrent, Term B, due 7/20/2006 2,992,574 3,000,939
-------------- --------------
9,975,302 9,945,002
Manufacturing-- NR++ B1 4,180,000 Terex Corp., Term C, due 2/05/2006 4,175,747 4,182,612
3.1% Thermadyne:
NR++ B1 1,485,000 Term B, due 5/22/2005 1,488,713 1,480,824
NR++ B1 1,485,000 Term C, due 5/22/2006 1,488,713 1,480,824
-------------- --------------
7,153,173 7,144,260
Medical B+ B1 2,000,000 Hanger Orthopedic Group Inc., Term B, due
Equipment--0.9% 12/30/2006 1,995,079 2,005,626
Metals & Mining NR++ NR++ 1,000,000 AEI Resources Inc., Term B, due 12/31/2004 992,752 987,500
- --1.7% NR++ Ba3 2,989,907 UCAR Global Enterprises, Term B, due
12/31/2002 2,997,382 2,997,382
-------------- --------------
3,990,134 3,984,882
</TABLE>
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (continued)
<CAPTION>
S&P Moody's Face Senior Secured Value
Industries Rating Rating Amount Floating Rate Loan Interests* Cost (Note 1a)
<S> <S> <S> <C> <S> <C> <C>
Packaging--2.0% Packaging Corp.:
BB Ba3 $ 2,324,380 Term B, due 4/12/2007 $ 2,310,497 $ 2,332,734
BB Ba3 2,324,380 Term C, due 4/12/2008 2,310,455 2,334,550
-------------- --------------
4,620,952 4,667,284
Paper--2.1% B+ Ba3 2,487,500 Jefferson Smurfit Company/Container Corp. of
America, Term B, due 3/24/2006 2,487,500 2,491,388
NR++ Ba3 2,396,930 Stone Container Corp., Term E, due 10/01/2003 2,396,930 2,399,927
-------------- --------------
4,884,430 4,891,315
Pharmaceuticals Dade Behring Inc.:
- --1.1% B+ Ba3 1,250,000 Term B, due 6/30/2006 1,243,862 1,254,166
B+ Ba3 1,250,000 Term C, due 6/30/2007 1,243,843 1,254,166
-------------- --------------
2,487,705 2,508,332
Printing & B+ Ba3 2,000,000 Advanstar Co., Term C, due 6/30/2007 1,997,025 2,000,000
Publishing NR++ Ba3 1,240,027 Penton Media, Term B, due 5/31/2006 1,238,520 1,240,544
- --1.8% B+ B1 1,000,000 Reiman Publications, Term, due 12/01/2005 1,005,000 1,002,292
-------------- --------------
4,240,545 4,242,836
Property NR++ Ba1 3,000,000 Prison Realty Trust Inc., Term C, due
Management 12/31/2002 2,981,655 2,987,499
- --1.3%
Transportation NR++ Ba2 2,000,000 Transport Manufacturing, Term B, due
- --Services 6/15/2006 1,995,144 2,000,000
- --2.2% NR++ Ba3 2,985,804 Travel Centers of America Inc., Term B,
due 3/27/2005 2,981,380 2,998,246
-------------- --------------
4,976,524 4,998,246
Waste Allied Waste:
Management-- BBB- Ba3 2,272,727 Term B, due 6/30/2006 2,259,851 2,256,984
2.2% BBB- Ba3 2,727,273 Term C, due 6/30/2007 2,711,796 2,708,806
-------------- --------------
4,971,647 4,965,790
Wired BB Ba2 1,500,000 Global Crossing Holding Ltd., Term B, due
Telecommunica- 7/02/2007 1,496,263 1,491,562
tions--0.6%
Wireless B B2 4,466,250 Centennial Cellular Operating Co., Term C,
Telecommunica- due 11/30/2007 4,459,602 4,482,418
tions--9.8% Dobson Sygnet:
NR++ NR++ 2,000,000 Term B, due 3/23/2007 2,000,000 2,001,666
NR++ NR++ 2,000,000 Term C, due 12/23/2007 2,000,000 2,005,416
B Ba3 2,000,000 Nextel Communications Inc., Term C, due
3/31/2007 2,000,000 1,998,750
NR++ B2 5,989,337 Omnipoint Communications Corp., Term C,
due 2/17/2006 5,928,233 5,931,941
NR++ NR++ 5,000,000 PowerTel PCS, Inc., Term B, due 2/06/2003 4,997,096 4,964,065
NR++ B2 1,000,000 Tritel Holdings, Term B, due 12/31/2007 987,886 998,958
-------------- --------------
22,372,817 22,383,214
Total Senior Secured Floating Rate
Loan Interests--86.7% 198,790,264 198,857,903
</TABLE>
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value
Amount Short-Term Securities Cost (Note 1a)
<S> <C> <S> <C> <C>
Commercial Paper**--5.2% $ 6,991,000 General Motors Acceptance Corp., 5.56% due
9/01/1999 $ 6,991,000 $ 6,991,000
5,000,000 Rank Xerox Capital, 5.20% due 9/09/1999 4,994,222 4,994,222
-------------- --------------
11,985,222 11,985,222
US Government Agency 6,000,000 Federal Home Loan Mortgage Corporation
Obligations**--5.9% Participation Certificates, 5.04% due 9/09/1999 5,993,280 5,993,280
Federal National Mortgage Association:
5,000,000 5.16% due 9/13/1999 4,991,400 4,991,400
2,500,000 5.20% due 9/17/1999 2,494,222 2,494,222
-------------- --------------
13,478,902 13,478,902
Total Short-Term Securities--11.1% 25,464,124 25,464,124
Total Investments--97.8% $ 224,254,388 224,322,027
==============
Other Assets Less Liabilities--2.2% 5,103,678
--------------
Net Assets--100.0% $ 229,425,705
==============
<FN>
++Not Rated.
*The interest rates on senior secured floating rate loan interests
are subject to change periodically based on the change in the prime
rate of a US Bank, LIBOR (London Interbank Offered Rate), or, in
some cases, another base lending rate.
**Commercial Paper and certain US Government Agency Obligations are
traded on a discount basis; the interest rates shown reflect the
discount rates paid at the time of purchase by the Fund.
Ratings of issues shown have not been audited by Deloitte & Touche
LLP.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$224,254,388) (Note 1b) $ 224,322,027
Cash 40,208
Receivables:
Capital shares sold $ 4,237,701
Interest 1,393,368
Principal paydowns 5,025
Commitment fees 1,698 5,637,792
---------------
Prepaid registration fees and other assets (Note 1f) 187,452
---------------
Total assets 230,187,479
---------------
Liabilities: Payables:
Dividends to shareholders (Note 1g) 363,942
Administrator (Note 2) 69,954
Investment adviser (Note 2) 25,403 459,299
---------------
Deferred income (Note 1e) 59,186
Accrued expenses and other liabilities 243,289
---------------
Total liabilities 761,774
---------------
Net Assets: Net assets $ 229,425,705
===============
Net Assets Common Stock, par value $.10 per share; 1,000,000,000 shares
Consist of: authorized $ 2,292,476
Paid-in capital in excess of par 227,088,500
Accumulated realized capital losses on investments--net (Note 6) (5,039)
Unrealized appreciation on investments--net 49,768
Net Assets--Equivalent to $10.01 per share based on shares of
22,924,759 capital stock outstanding $ 229,425,705
===============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Operations
<CAPTION>
For the Period
March 26, 1999++
to August 31, 1999
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 4,815,971
(Note 1e): Facility and other fees 6,651
---------------
Total income 4,822,622
---------------
Expenses: Investment advisory fees (Note 2) $ 625,622
Administrative fees (Note 2) 263,423
Professional fees 48,457
Registration fees (Note 1f) 40,404
Assignment fees 38,942
Accounting services (Note 2) 28,048
Printing and shareholder reports 25,000
Directors' fees and expenses 23,639
Transfer agent fees (Note 2) 21,329
Tender offer costs (Note 7) 19,620
Custodian fees 10,600
Other 19,891
---------------
Total expenses before reimbursement 1,164,975
Reimbursement of expenses (Note 2) (802,357)
---------------
Total expenses after reimbursement 362,618
---------------
Investment income--net 4,460,004
---------------
Realized & Realized loss on investments--net (5,039)
Unrealized Gain Unrealized appreciation on investments--net 49,768
(Loss) on ---------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 4,504,733
(Notes 1c, ===============
1e & 3):
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
FINANCIAL INFORMATION (continued)
<TABLE>
Statement of Changes in Net Assets
<CAPTION>
For the Period
March 26, 1999++
Increase (Decrease) in Net Assets: to August 31, 1999
<S> <S> <C>
Operations: Investment income--net $ 4,460,004
Realized loss on investments--net (5,039)
Unrealized appreciation on investments--net 49,768
---------------
Net increase in net assets resulting from operations 4,504,733
---------------
Dividends to Investment income--net (4,460,004)
Shareholders ---------------
(Note 1g): Net decrease in net assets resulting from dividends to shareholders (4,460,004)
---------------
Capital Share Net increase in net assets resulting from capital share transactions 229,280,976
Transactions ---------------
(Note 4):
Net Assets: Total increase in net assets 229,325,705
Beginning of period 100,000
---------------
End of period $ 229,425,705
===============
<FN>
++Commencement of operations.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements For the Period
March 26, 1999++
Increase (Decrease) in Net Assets: to August 31, 1999
<S> <S> <C>
Per Share Net asset value, beginning of period $ 10.00
Operating ---------------
Performance: Investment income--net .27
Realized and unrealized gain on investments--net .01
---------------
Total from investment operations .28
---------------
Less dividends from investment income--net (.27)
---------------
Net asset value, end of period $ 10.01
===============
Total Investment Based on net asset value per share 3.02%+++
Return:** ===============
Ratio to Average Expenses, net of reimbursement .55%*
Net Assets: ===============
Expenses 1.77%*
===============
Investment income--net 6.77%*
===============
Supplemental Net assets, end of period (in millions) $ 229
Data: ===============
Portfolio turnover 28.49%
===============
<FN>
*Annualized.
**Total investment returns exclude the early withdrawal charge, if
any. The Fund is a continuously offered closed-end fund, the shares
of which are offered at net asset value. Therefore, no separate
market exists.
++Commencement of operations.
+++Aggregrate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Senior Floating Rate Fund II, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
continuously offered, non-diversified, closed-end management
investment company. The Fund's financial statements are prepared in
accordance with generally accepted accounting principles, which may
require the use of management accruals and estimates. Prior to
commencement of operations on March 26, 1999, the Fund had no
operation other than those relating to organizational matters and
the issuance of 10,000 shares of Common Stock to Merrill Lynch Asset
Management, L.P. ("MLAM") for $100,000 on March 19, 1999.
(a) Loan participation interests--The Fund invests in senior secured
floating rate loan interests ("Loan Interests") with collateral
having a market value, at time of acquisition by the Fund, which
Fund management believes equals or exceeds the principal amount of
the corporate loan. The Fund may invest up to 20% of its total
assets in loans made on an unsecured basis. Depending on how the
loan was acquired, the Fund will regard the issuer as including the
corporate borrower along with an agent bank for the syndicate of
lenders and any intermediary of the Fund's investment. Because
agents and intermediaries are primarily commercial banks, the Fund's
investment in corporate loans at August 31, 1999 could be considered
to be concentrated in commercial banking.
(b) Valuation of investments--Loan Interests will be valued in
accordance with guidelines established by the Board of Directors.
Until July 9, 1999, Loan Interests for which an active secondary
market exists and for which the Investment Adviser can obtain at
least two quotations from banks or dealers in Loan Interests were
valued by calculating the mean of the last available bid and asked
prices in the markets for such Loan Interests, and then using the
mean of those two means. If only one quote for a particular Loan
Interest was available, such Loan Interest were valued on the basis
of the mean of the last available bid and asked prices in the
market. As of July 12, 1999, pursuant to the approval of the Board
of Directors, the Loan Interests are valued at the mean between the
last available bid and asked prices from one or more brokers or
dealers as obtained from Loan Pricing Corporation. For Loan
Interests for which an active secondary market does not exist to a
reliable degree in the opinion of the Investment Adviser, such Loan
Interests will be valued by the Investment Adviser at fair value,
which is intended to approximate market value.
Other portfolio securities may be valued on the basis of prices
furnished by one or more pricing services, which determine prices
for normal, institutional-size trading units of such securities
using market information, transactions for comparable securities and
various relationships between securities that are generally
recognized by institutional traders. In certain circumstances,
portfolio securities are valued at the last sale price on the
exchange that is the primary market for such securities, or the last
quoted bid price for those securities for which the over-the-counter
market is the primary market or for listed securities in which there
were no sales during the day. Short-term securities with remaining
maturities of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of
Directors of the Fund.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Interest rate transactions--The Fund is authorized to enter into
interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
NOTES TO FINANCIAL STATMENTS (concluded)
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest is recognized on the accrual basis.
Realized gains and losses on security transactions are determined on
the identified cost basis. Facility fees are accreted into income
over the term of the related loan.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
2. Investment Advisory and Administrative
Services Agreement and Transactions with
Affiliates:
The Fund has entered into an Investment Advisory Agreement with
MLAM. The general partner of MLAM is Princeton Services, Inc.
("PSI"), an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to perform this investment advisory
function. For such services, the Fund pays a monthly fee at an
annual rate of .95% of the Fund's average daily net assets. For the
period March 26, 1999 to August 31, 1999, MLAM earned fees of
$625,622, of which $600,717 was voluntarily waived. FAM also
reimbursed the Fund for additional expenses of $201,640.
The Fund also has an Administrative Services Agreement with MLAM
whereby MLAM will receive a fee equal to an annual rate of .40% of
the Fund's average daily net assets on a monthly basis, in return
for the performance of administrative services (other than
investment advice and related portfolio activities) necessary for
the operation of the Fund.
For the period March 26, 1999 to August 31, 1999, Merrill Lynch
Funds Distributor ("MLFD"), a division of Princeton Funds
Distributor, Inc. ("PFD"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc. earned early withdrawal charges of $30,210
relating to the tender of the Fund's shares.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period March 26, 1999 to August 31, 1999 were $226,865,887
and $28,087,975, respectively.
Net realized losses for the period March 26, 1999 to August 31, 1999
and net unrealized gains as of August 31, 1999 were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (2,942) $ 67,639
Short-term investments (2,097) --
Unfunded loan interests -- (17,871)
----------- ------------
Total $ (5,039) $ 49,768
=========== ============
As of August 31, 1999, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $67,639, of
which $484,540 is related to appreciated securities and $416,901 is
related to depreciated securities. The aggregate cost of investments
at August 31, 1999 for Federal income tax purposes was $224,254,388.
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Period March 26, 1999++ Dollar
to August 31, 1999 Shares Amount
Shares sold 23,185,920 $231,994,651
Shares issued to share-
holders in reinvestment
of dividends 204,831 2,051,012
------------ ------------
Total issued 23,390,751 234,045,663
Shares tendered (475,992) (4,764,687)
------------ ------------
Net increase 22,914,759 $229,280,976
============ ============
[FN]
++Prior to March 26, 1999 (commencement of operations), the Fund
issued 10,000 shares to MLAM for $100,000.
Merrill Lynch Senior Floating Rate Fund II, Inc.
August 31, 1999
5. Unfunded Loan Interests:
As of August 31, 1999, the Fund had unfunded loan commitments of
$10,789,150, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
Chancellor Media Corp. $ 1,555
Key Energy Services Inc. 3,500
Speciality Foods, Inc. 734
Terex Corp. 5,000
6. Capital Loss Carryforward:
At August 31, 1999, the Fund had a net capital loss carryforward of
approximately $5,000, all of which expires in 2007. This amount will
be available to offset like amounts of any future taxable gains.
7. Subsequent Event:
The Fund began a quarterly tender offer on September 21, 1999 which
concludes on October 19, 1999.
<AUDIT-REPORT>
INDEPENDENT AUDITOR' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Senior Floating Rate Fund II, Inc.:
We have audited the accompanying statement of assets and
liabilities, including the schedule of investments, of Merrill Lynch
Senior Floating Rate Fund II, Inc. as of August 31, 1999, the
related statements of operations and changes in net assets, and the
financial highlights for the period March 26, 1999 (commencement of
operations) to August 31, 1999. These financial statements and the
financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our
audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at August
31, 1999 by correspondence with the custodian and financial
intermediaries or other alternative procedures. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Senior Floating Rate Fund II, Inc. as of August 31,
1999, the results of its operations, the changes in its net assets,
and the financial highlights for the period March 26, 1999
(commencement of operations) to August 31, 1999 in conformity with
generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 19, 1999
</AUDIT-REPORT>
