PROSPECTUS
December 27, 1999
Merrill Lynch Senior Floating Rate Fund II, Inc.
Common Stock
Merrill Lynch Senior
Floating Rate Fund II, Inc. (the Fund) is a continuously
offered, non-diversified, closed-end fund. The Fund seeks as high a level of
current income and such preservation of capital as is consistent with
investment in senior collateralized corporate loans (primarily in the form
of participation interests) made by banks and other financial institutions.
There can be no assurance that the investment objective of the Fund will be
realized. Currently, there is no secondary market for the Funds common
stock. To provide liquidity, the Fund intends to make quarterly tender
offers for its shares. In a tender offer, the Fund repurchases outstanding
shares at the Funds net asset value on the last day of the offer. If a
tender offer is not made, shareholders may not be able to sell their
shares.
Shares of common
stock of the Fund are offered on a best efforts basis at a price equal to
the next determined net asset value per share without a front-end sales
charge. As of the date of this Prospectus, net asset value per share is
$9.97. Shares may be purchased directly from Merrill Lynch Funds
Distributor, a division of Princeton Funds Distributor, Inc., or from
selected other securities dealers, including Merrill Lynch, Pierce, Fenner
& Smith Incorporated (Merrill Lynch).
This Prospectus
contains information you should know before investing, including information
about risks. Please read it before you invest and keep it for future
reference. The Securities and Exchange Commission has not approved or
disapproved these securities or determined if this Prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
|
|
Price to
Public(1) |
|
Underwriting
Discount(2) |
|
Proceeds to
Fund(3) |
|
Per Share |
|
$9.97 |
|
None |
|
$9.97 |
|
Total(3) |
|
$873,963,121 |
|
None |
|
$873,963,121 |
(1)
|
Net asset value ranged
from $10.02 to $9.96 per share between March 26, 1999 (commencement of
operations) to the date of this Prospectus.
|
(2)
|
The Distributor pays all
offering expenses (other than registration fees) and sales commissions to
selected dealers (primarily Merrill Lynch) from its own assets. Therefore,
all of the proceeds of this offering will be available to the Fund for
investment in portfolio securities. See Purchase of Shares.
|
(3)
|
These amounts (a) do not
take into account prepaid registration fees (approximately $39,754), which
are being charged to income as the related shares are issued, and (b)
assume all shares currently registered are sold in the continuous
offering.
|
Merrill Lynch Funds Distributor
Distributor
Merrill Lynch Asset Management Investment
Adviser
This summary is
qualified in its entirety by reference to the detailed information included
in this Prospectus.
The
Fund
|
|
Merrill Lynch
Senior Floating Rate Fund II, Inc. is a continuously offered
non-diversified, closed-end fund.
|
|
The
Offering
|
|
Shares of common
stock of the Fund are offered by the Distributor and other securities
dealers, including Merrill Lynch. Investors also may mail a purchase order
directly to Financial Data Services, Inc., the Funds Transfer
Agent.
The Fund offers its common stock on a best efforts basis at a price
equal to the next determined net asset value per share without a front-end
sales charge. Shares are sold subject to certain minimum purchase
requirements:
|
|
For Investments
in the Fund made
|
|
The
Minimum
Initial
Purchase
Amount is |
|
The
Minimum
Subsequent
Purchase
Amount is |
Directly through the Funds
Distributor
or Transfer Agent |
|
$ 1,000 |
|
$ 50 |
Via a Merrill Lynch-maintained 401(k)
or 403(b) plan |
|
None |
|
None |
Via another retirement plan |
|
$ 250 |
|
$ 1 |
|
Investment Objective
and Policies
|
|
The Fund seeks to
provide shareholders with as high a level of current income and such
preservation of capital as is consistent with investment in senior
collateralized corporate loans made to U.S. or non-U.S. borrowers that
meet the credit standards established by the Funds investment
adviser. An investment in the Fund entails certain risks.
Corporate Loans. The Fund invests
primarily in corporate loans that are direct obligations of a borrower
undertaken to finance the growth of the borrowers business or a
capital restructuring. A significant portion of such corporate loans are
highly leveraged loans such as leveraged buy-out loans, leveraged
recapitalization loans and other types of acquisition loans. The Fund also
may invest in privately placed notes with credit and pricing terms that
are, in the opinion of the Investment Adviser, consistent with investment
in senior collateralized corporate loans.
|
|
|
|
Floating or
Variable Rate Corporate Loans. Under normal
market conditions, the Fund will invest at least 65% of its assets in
corporate loans that have floating or variable interest rates. Floating
rate corporate loan interest rates adjust periodically at a margin above a
generally-recognized base lending rate such as the prime rate of a
designated U.S. bank, the Certificate of Deposit rate or the London
InterBank Offered Rate.
Credit Quality. The Fund will invest
in a corporate loan only if, in the Investment Advisers judgment,
the borrower can meet debt service on such loan. The Investment Adviser
performs its own credit analysis of each borrower. Since the minimum debt
rating of a borrower may not have a meaningful relationship to the quality
of such borrowers senior collateralized debt, the Fund does not
impose any minimum standard regarding the rating of other debt instruments
of the borrower. The Fund may invest without limitation in corporate loans
rated below investment grade (i.e., below BBB or Baa) or which are
unrated but of similar credit quality.
Unsecured Loans and Short-Term Investments.
Generally the Fund invests at least 80% of its assets in senior
collateralized corporate loans. The remainder of the Funds assets
may be invested in unsecured senior loans. The Fund also may invest in
cash or in secured or unsecured short-term debt obligations. Short-term
debt obligations in which the Fund invests are rated investment grade
(i.e., within the four highest rating categories assigned by a
nationally recognized rating service) or, if not rated, are determined to
be of comparable quality by the Investment Adviser. Obligations rated in
the fourth highest rating category may include obligations considered to
have certain speculative characteristics.
Portfolio Maturity. The Fund has no
restrictions on portfolio maturity, but it is anticipated that a majority
of the corporate loans in which it invests will have stated maturities
ranging from three to ten years. As a result of prepayments, however, the
average life of the corporate loans is expected to be in the two to three
year range.
Foreign and Domestic Borrowers. The
Fund may invest in corporate loans made to U.S. or non-U.S. borrowers,
provided that the loans are U.S. dollar-denominated or otherwise provide
for payment to the Fund in U.S. dollars.
|
|
|
|
Hedging
Techniques. The Fund may engage in certain
interest rate hedging transactions, such as swaps, caps
or floors, to reduce the Funds exposure to
interest rate movements. The Fund also may invest in corporate loans that
pay interest and principal in a currency other than U.S. dollars if the
loan arrangement also includes a foreign currency swap that entitles the
Fund to receive payments in U.S. dollars, or if the Fund hedges the
foreign currency exposure itself utilizing forward contracts or other
methods.
|
|
Borrowings by the
Fund
|
|
The Fund may
borrow money in amounts up to 33 1
/3% of the value of its total assets. Typically the Fund borrows to
satisfy tender offers, if necessary, but it also is authorized to borrow
to finance additional investments. The Fund will borrow to finance
additional investments only when the Investment Adviser believes that the
potential return on such additional investments will exceed the costs
incurred in connection with the borrowing.
|
|
Investment Adviser and
Administrator
|
|
Merrill Lynch
Asset Management, L.P., the Investment Adviser, provides investment
advisory and administrative services to the Fund. For advisory services,
the Fund pays the Investment Adviser a fee at the annual rate of 0.95% of
the Funds average daily net assets. For its administrative services,
the Fund pays the Investment Adviser a fee at the annual rate of 0.40% of
the Funds average daily net assets. While the combined advisory and
administrative fees are higher than that paid by most funds, they are
comparable to those paid by other continuously offered closed-end funds
investing primarily in corporate loans.
|
|
Distributions
|
|
The Fund intends
to declare dividends daily, pay dividends monthly and distribute all of
its net investment income. Net capital gains, if any, will be distributed
at least annually.
|
|
Tender
Offers
|
|
Currently, there
is no secondary market for the Funds common stock, and it is not
expected that a secondary market will develop. To provide liquidity, the
Board of Directors intends to consider, on a quarterly basis, whether the
Fund should make a tender offer for its shares. In a tender offer, the
Fund repurchases outstanding shares at the Funds net asset value on
the last day of the offer. If a tender offer is not made, shareholders may
not be able to sell their shares.
|
|
Early Withdrawal
Charge
|
|
Tendered shares
of common stock held for less than one year at the date of tender are
subject to an early withdrawal charge in most cases. It is based on the
lesser of cost or net asset value of the tendered shares. There is no
charge when shares are tendered after more than one year.
|
|
RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity of
Shares. The Fund is designed primarily for long
term investors and should not be considered a vehicle for trading purposes.
Currently, there is no secondary market for the Funds common stock,
and a secondary market is not expected to develop. To provide liquidity to
shareholders, the Board of Directors of the Fund intends to consider making
quarterly tender offers to repurchase the Funds shares at net asset
value. However, the Funds shares are less liquid than shares of funds
traded on a stock exchange, and shareholders who tender Fund shares held for
less than one year will pay an early withdrawal charge. The Board of
Directors is not obligated to authorize any tender offer, and there may be
quarters in which no tender offer is made. If the Board of Directors does
not authorize a tender offer, shareholders may be unable to sell their
shares. Merrill Lynch and other selected dealers are prohibited from making
a market in the Funds common stock while the Fund either is offering
its shares or is making a tender offer to repurchase its shares.
Closed-end funds that
do trade in a secondary market are subject to the risk that the net asset
value of the shares may be higher than the market price, commonly referred
to as trading at a discount. As long as there is no secondary
market for the Funds shares, the Fund is not subject to this
risk.
Non-payment.
The corporate loans in which the Fund invests are
subject to the risk of non-payment of interest and principal. When a
borrower fails to make scheduled interest or principal payments on a debt
instrument, the value of the instrument, and hence the value of the Fund
s shares, may go down. While collateral may provide some protection
against devaluation due to a default on a collateralized loan, losses may
not be completely covered by the liquidation or sale of collateral. To the
extent the corporate loan is secured by stock of the borrower and/or its
subsidiaries and affiliates, such stock may lose all of its value in the
event of a bankruptcy or insolvency of the borrower.
The Fund may invest
without limitation in corporate loans rated below investment grade
(i.e., below BBB or Baa) or which are unrated but of similar credit
quality. These investments have a higher risk of non-payment than investment
grade investments.
Corporate loans made
in connection with highly leveraged transactions are subject to greater
risks than other corporate loans. For example, the risks of default or
bankruptcy of the borrower or the risks that other creditors of the borrower
may seek to nullify or subordinate the Funds claims on the collateral
securing the loan are greater in highly leveraged transactions.
Intermediary.
The Fund may invest in corporate loans either by
participating as a co-lender at the time the loan is originated or by buying
an interest in the loan from an institution acting as agent, co-lender or
participant. The financial status of the institutions interposed between the
Fund and a borrower may affect the ability of the Fund to receive principal
and interest payments. For this reason, the Fund will invest in corporate
loans only if, at the time of investment, the outstanding debt obligations
of these intermediary institutions are rated investment grade or are of
comparable quality in the judgment of the Investment Adviser.
The success of the
Fund depends, to a great degree, on the skill with which an agent bank
administers the terms of the corporate loan agreements, monitors borrower
compliance with covenants, collects principal, interest and fee payments
from borrowers and, where necessary, enforces creditor remedies against
borrowers. Agent banks typically have broad discretion in enforcing
corporate loan agreements.
Net Asset Value;
Interest Rate Sensitivity, Credit Quality and Other Market Conditions.
Generally, when interest rates go up, the value of
fixed income debt securities goes down. Therefore, the net asset value of a
fund that invests primarily in fixed income debt securities changes as
interest rates fluctuate. Because the Fund invests primarily in floating or
variable rate debt obligations, the Investment Adviser expects that it will
be insulated to a significant degree from net asset value fluctuations
caused by movements in interest rates. However, because floating and
variable rate debt obligations only reset periodically, the Funds net
asset value may fluctuate from time to time due to interest rate movements
when there is an imperfect correlation between the interest rates on the
variable rate loans in the Funds portfolio and prevailing interest
rates. A decline in the credit quality or financial condition of borrowers
in which the Fund invests may result in the value of the corporate loans
held by the Fund, and hence the Funds net asset value, going down. A
serious deterioration in the credit quality or financial condition of a
borrower could cause a permanent decrease in the Funds net asset
value. Furthermore, volatility in the capital markets and other adverse
market conditions may result in a decrease in the value of corporate loans
held by the Fund. Given that the Fund uses market prices to value many of
its corporate loan investments, any decrease in the market value of the
corporate loans held by the Fund will result in a decrease in the Fund
s net asset value.
Borrowings by the
Fund. If the Fund chooses to borrow money, rather
than liquidate investments, to satisfy a tender offer, it is subject to the
risk that investment return on Fund shares will be reduced to the extent the
cost of the borrowings exceeds income on the retained
investments.
Hedging.
Hedging transactions subject the Fund to the risk
that, if the Investment Adviser incorrectly forecasts market values,
interest rates or other applicable factors, the Funds performance
could suffer. In addition, if the counterparty to an interest rate hedging
transaction defaults, the Funds risk of loss consists of the net
amount of interest payments that the Fund contractually is entitled to
receive. The Fund is not required to enter into interest rate hedging
transactions and may not do so. If the counterparty to a foreign currency
swap defaults, the Fund will seek a replacement swap, which may result in
additional costs to the Fund, and will be subject to fluctuations in the
applicable exchange rate until a replacement swap is obtained.
Concentration.
The Funds investments may be concentrated in
obligations issued by financial institutions and their holding companies,
including commercial banks, thrift institutions, insurance companies and
finance companies. As a result, the Fund is subject to certain risks
associated with such institutions, including, among other things, changes in
government regulation, interest rate levels and general economic
conditions.
Foreign Investment.
Loans to non-U.S. borrowers may involve risks
not typically involved in domestic investment, including fluctuation in
foreign interest rates, future foreign political and economic developments
and the possible imposition of exchange controls or other governmental laws
or restrictions.
Non-diversification. The Fund is classified
as a non-diversified investment company, meaning that the Fund may invest a
greater percentage of its assets in the obligations of a single issuer than
a diversified investment company. Even as a non-diversified fund, the Fund
is still subject to the diversification requirements of the U.S. tax laws.
However, since the Fund may invest a higher percentage of its assets in
obligations of a single issuer than a diversified fund, it is more
susceptible than a diversified fund to any economic, political or regulatory
occurrence that affects an individual issuer.
Liquidity of
Investments. Certain corporate loans in which the
Fund invests may be deemed to be illiquid. Illiquid investments may impair
the Funds ability to realize the full value of those investments in
the event the Fund must sell them quickly. The Funds Board of
Directors will consider the liquidity of the Funds portfolio in
determining whether a tender offer should be made.
Shareholder Transaction
Expenses |
|
|
|
|
Maximum Sales Load (as a percentage of offering
price) |
|
None |
|
|
|
Dividend Reinvestment and Cash Purchase Plan
Fees |
|
None |
|
|
|
Early Withdrawal Charge (as a percentage of the lesser
of the original purchase
price or net asset value at the time of
repurchase)(a) |
|
1.0% during the first
year, 0.0% thereafter |
Annual Expenses (as a percentage of net
assets) |
|
|
|
|
Investment Advisory Fees(b) |
|
0.95 |
% |
|
|
Interest Payments on Borrowed Funds(c) |
|
0.00 |
|
|
|
Other Expenses(d) |
|
0.82 |
|
|
|
|
|
|
|
|
|
Total Annual Expenses |
|
1.77 |
% |
|
|
|
|
|
|
|
|
(a)
|
See Early
Withdrawal Chargepage 27.
|
(b)
|
See
Investment Advisory and Administrative Arrangementspage
30.
|
(c)
|
Typically the
Fund will borrow only when sufficient cash is otherwise unavailable to
satisfy tender offers.
|
(d)
|
Includes
administrative fees, which are payable to the Investment Adviser by the
Fund, at the annual rate of 0.40% of average daily net assets. See
Investment Advisory and Administrative Arrangementspage
30.
|
EXAMPLE |
|
1
Year
|
|
3 Years
|
|
5 Years
|
|
10 Years
|
An investor would pay the following
expenses on a $1,000 investment
assuming (1) total annual expenses of 1.77%,
(2) a 5% annual return
throughout the periods and (3) tender at the
end of the period |
|
$28 |
* |
|
$56 |
|
$96 |
|
$208 |
An investor would pay the following
expenses on a $1,000 investment
assuming no tender at the end of the
period |
|
$18 |
* |
|
$56 |
|
$96 |
|
$208 |
*
|
Reflects the
early withdrawal charge.
|
The Fee Table is
intended to assist investors in understanding the costs and expenses that a
shareholder in the Fund will bear directly or indirectly. The expenses set
forth under Other Expenses are based on estimated amounts
through the end of the Funds current fiscal year. The Example set
forth above assumes reinvestment of all dividends and distributions and
utilizes a 5% annual rate of return as mandated by Securities and Exchange
Commission regulations. The Example should not be considered a
representation of past or future expenses or annual rates of return, and
actual expenses or annual rates of return may be more or less than those
assumed for purposes of the Example. Merrill Lynch may charge its
customers a processing fee (presently $5.35) for confirming purchases and
repurchases. Purchases and repurchases made directly through the Transfer
Agent are not subject to the processing fee.
The financial
information in the table below was audited in conjunction with the annual
audits of the financial statements of the Fund by Deloitte & Touche
LLP
, independent auditors. Financial statements for the fiscal year ended August
31, 1999 and the independent auditors report thereon appear in the
annual report of the Fund for the fiscal year ended August 31, 1999, which
is incorporated by reference herein. Further information about the
performance of the Fund is contained in the annual report, which may be
obtained, without charge, by writing the Fund at the address on the inside
back cover of this Prospectus or by calling (609) 282-2800.
The following per
share data and ratios are derived from information provided in the Fund
s audited financial statements.
|
|
For the Period
March 26, 1999
to August 31,
1999
|
Increase (Decrease) in
Net Asset Value: |
|
|
|
Per Share Operating
Performance: |
|
|
|
Net asset value, beginning
of period |
|
$10.00 |
|
|
|
|
|
Investment incomenet |
|
.27 |
|
Realized and unrealized gain
(loss) |
|
|
|
on
investmentsnet |
|
.01 |
|
|
|
|
|
Total from investment
operations |
|
.28 |
|
|
|
|
|
Less dividends from
investment |
|
|
|
incomenet |
|
(.27 |
) |
|
|
|
|
Net asset value, end of
period |
|
$10.01 |
|
|
|
|
|
Total Investment
Return:** |
|
|
|
Based on net asset value per
share |
|
3.02 |
%# |
|
|
|
|
Ratios to Average Net
Assets: |
|
|
|
Expenses, net of
reimbursement |
|
.55 |
%* |
|
|
|
|
Expenses |
|
1.77 |
%* |
|
|
|
|
Investment incomenet |
|
6.77 |
%* |
|
|
|
|
Leverage: |
|
|
|
Average amount of borrowings
outstanding during the period (in thousands) |
|
|
|
|
|
|
|
Average amount of borrowings
outstanding per share during the period |
|
|
|
|
|
|
|
Supplemental
Data: |
|
|
|
Net assets, end of period (in
millions) |
|
$ 229 |
|
|
|
|
|
Portfolio turnover |
|
28.49 |
% |
|
|
|
|
**
|
Total investment returns
exclude the effects of 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.
|
#
|
Aggregate total investment
return.
|
Merrill Lynch Senior
Floating Rate Fund II, Inc. is a continuously offered, non-diversified,
closed-end management investment company. The Fund was incorporated under
the laws of the State of Maryland on February 9, 1999 and has registered
under the Investment Company Act of 1940 (the 1940 Act). The Fund
s principal office is located at 800 Scudders Mill Road, Plainsboro,
New Jersey 08536 and its telephone number is (609) 282-2800.
INVESTMENT OBJECTIVE AND POLICIES
The Funds
investment objective is to provide as high a level of current income and
such preservation of capital as is consistent with investment in senior
collateralized corporate loans (corporate loans) primarily in
the form of Participation Interests, as defined below, in corporate loans
made by banks or other financial institutions. It is anticipated that the
corporate loans will pay interest at rates that float at a margin above a
generally recognized base lending rate such as the prime rate of a
designated U.S. bank, or which adjust periodically at a margin above the
Certificate of Deposit (CD) rate or the London InterBank Offered
Rate (LIBOR). This is a fundamental policy of the Fund and may
not be changed without a vote of a majority of the outstanding shares of the
Fund. There can be no assurance that the investment objective of the Fund
will be realized.
Under normal market
conditions the Fund will invest at least 80% of its total assets in
interests in corporate loans that have floating or variable interest rates.
Under normal market conditions, at least 65% of the total assets of the Fund
will be invested in floating or variable rate loans made to corporations.
The Fund may invest up to 20% of its total assets in cash or in short-term
debt obligations including, but not limited to, U.S. Government and
Government agency securities (some of which may not be backed by the full
faith and credit of the United States), bank money instruments (such as
certificates of deposit and bankers acceptances), corporate and
commercial obligations (such as commercial paper and medium-term notes) and
repurchase agreements. Such short-term debt obligations, which need not be
secured, will all be investment grade (rated Baa, P-3 or higher by Moody
s Investors Service, Inc. (Moodys) or BBB, A-3 or
higher by Standard & Poors (S&P) or, if unrated,
determined to be of comparable quality in the judgment of the Investment
Adviser). Securities rated Baa, BBB, P-3 or A-3 are considered to have
adequate capacity for payment of principal and interest, but are more
susceptible to adverse economic conditions and, in the case of securities
rated BBB or Baa (or comparable unrated securities), have speculative
characteristics. Such short term debt securities or cash will not exceed 20%
of the Funds total assets except during interim periods pending
investment of the net proceeds of public offerings of the Funds
securities and during temporary defensive periods when, in the opinion of
the Investment Adviser, suitable corporate loans are not available for
investment by the Fund or prevailing market or economic conditions warrant.
The Fund also may invest up to 20% of its total assets in senior loans made
on an unsecured basis. Investments in unsecured corporate loans will be made
on the same basis as investments in corporate loans as described herein,
except with respect to collateral requirements. To a limited extent,
incidental to and in connection with its lending activities, the Fund also
may acquire warrants and other debt and equity securities.
The Fund has no
restrictions on portfolio maturity, but it is anticipated that a majority of
the corporate loans in which it will invest will have stated maturities
ranging from three to ten years. As a result of prepayments, however, it is
expected that the average life of the corporate loans will be in the two to
three year range. See Description of Corporate Loans.
Investment in shares
of common stock of the Fund offers several benefits. The Fund offers
investors the opportunity to receive a high level of current income by
investing in a professionally managed portfolio comprised primarily of
corporate loans, a type of investment typically not available to individual
investors. In managing such portfolio, Merrill Lynch Asset Management, L.P.,
the investment adviser (the Investment Adviser), provides the
Fund and its shareholders with professional credit analysis and portfolio
diversification. The Fund also relieves the investor of the burdensome
administrative details involved in managing a portfolio of such investments,
if available to individual investors. The benefits are at least partially
offset by the expenses involved in operating an investment company. Such
expenses primarily consist of the investment advisory and administrative
fees and operational costs.
The net asset value
of the shares of common stock of an investment company that invests
primarily in fixed-income securities changes as the general levels of
interest rates fluctuate. When interest rates decline, the value of a
fixed-income portfolio can be expected to rise. Conversely, when interest
rates rise, the value of a fixed-income portfolio can be expected to
decline. The Investment Adviser expects the Funds net asset value to
be relatively stable during normal periods of rising or falling interest
rates, because the Funds portfolio will consist primarily of floating
and variable rate corporate loans, of fixed rate corporate loans hedged by
interest rate swap transactions and of short term instruments. For these
reasons, the Investment Adviser expects the value of the Funds
portfolio to fluctuate significantly less as a result of interest rate
changes than would a portfolio of fixed rate obligations. However, because
variable interest rates only reset periodically, the value of the Fund
s portfolio may fluctuate from time to time in the event of an
imperfect correlation between either the interest rates on variable rate
loans in the Funds portfolio or the variable interest rates on
notional amounts in interest rate swap transactions, and prevailing interest
rates. Also, a sudden and extreme increase in prevailing interest rates may
cause a decline in the value of the Funds portfolio. Conversely, a
sudden and extreme decline in interest rates could result in an increase in
the value of the Funds portfolio. Most importantly, a decline in the
credit quality or financial condition of the borrowers in which the Fund has
invested may result in a decrease in the value of the Funds portfolio.
A decline in the credit quality or financial condition of a borrower may
lead to a default on the corporate loan held by the Fund. A serious
deterioration in the credit quality or financial condition of a borrower
could cause a permanent decrease in the value of the Funds portfolio.
Furthermore, volatility in the capital markets and other adverse market
conditions may cause a decline in the value of the Funds portfolio.
Given that the Fund uses market prices to value many of its corporate loan
investments, any decrease in the value of the corporate loans held by the
Fund (permanent or otherwise) will result in a decrease in the Funds
net asset value.
The Fund is
classified as non-diversified within the meaning of the 1940 Act, which
means that the Fund is not limited by such Act in the proportion of its
assets that it may invest in securities of a single issuer. However, the Fund
s investments will be limited so as to qualify the Fund as a
regulated investment company for purposes of the Federal tax
laws. See Taxes. To qualify, among other requirements, the Fund
will limit its investments so that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the Funds
total assets will be invested in the securities (other than U.S. Government
securities) of a single issuer and (ii) with respect to 50% of the market
value of its total assets, not more than 5% of the market value of its total
assets will be invested in the securities (other than U.S. Government
securities) of a single issuer. A fund that elects to be classified as
diversified under the 1940 Act must satisfy the foregoing 5%
requirement with respect to 75% of its total assets. To the extent that the
Fund assumes large positions in the securities of a small number of issuers,
the Funds net asset value may fluctuate to a greater extent than that
of a diversified company as a result of changes in the financial condition
or in the markets assessment of the issuers.
Description of Corporate Loans
The corporate loans
in which the Fund invests primarily consist of direct obligations of a
borrower undertaken to finance the growth of the borrowers business,
internally or externally, or to finance a capital restructuring. Corporate
loans may also include debtor in possession financings pursuant to Chapter
11 of the U.S. Bankruptcy Code and obligations of a borrower issued in
connection with a restructuring pursuant to Chapter 11 of the U.S.
Bankruptcy Code. A significant portion of such corporate loans are highly
leveraged loans such as leveraged buy-out loans, leveraged recapitalization
loans and other types of acquisition loans. Such corporate loans may be
structured to include both term loans, which are generally fully funded at
the time of the Funds investment, and revolving credit facilities,
which would require the Fund to make additional investments in the corporate
loans as required under the terms of the credit facility. Such corporate
loans may also include receivables purchase facilities, which are similar to
revolving credit facilities secured by a borrowers receivables.
Corporate loans generally are issued in the form of senior syndicated loans,
but the Fund also may invest from time to time in privately placed notes
with credit and pricing terms which are, in the opinion of the Investment
Adviser, consistent with investments in senior collateralized loan
obligations. The Fund may invest without limitation in highly leveraged
corporate loans that are rated below investment grade or that are unrated
but of similar credit quality. See Risk Factors and Special
Considerations.
The Fund may invest
in corporate loans that are made to non-U.S. borrowers, provided that the
loans are U.S. dollar-denominated or otherwise provide for payment in U.S.
dollars, and any such borrower meets the credit standards established by the
Investment Adviser for U.S. borrowers. The Fund similarly may invest in
corporate loans made to U.S. borrowers with significant non-dollar
denominated revenues, provided that the loans are U.S. dollar-denominated or
otherwise provide for payment to the Fund in U.S. dollars. In all cases
where the corporate loans are not denominated in U.S. dollars, the corporate
loan facility will provide for payments to the lenders, including the Fund,
in U.S. dollars pursuant to foreign currency swap arrangements. Loans to
such non-U.S. borrowers or U.S. borrowers may involve risks not typically
involved in domestic investment, including fluctuation in foreign exchange
rates, future foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or U.S. governmental laws
or restrictions applicable to such loans. With respect to certain foreign
countries, there is the possibility of expropriation or confiscatory
taxation, political or social instability, or diplomatic developments which
could affect the Funds investments in those countries. Moreover,
individual foreign economies may differ favorably or unfavorably from the
U.S. economy in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and balance of
payment position. In addition, information with respect to non-U.S.
borrowers may differ from that available with respect to U.S. borrowers,
since foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, practices and requirements
comparable to those applicable to U.S. borrowers.
The corporate loans
in which the Fund invests, in many instances, hold the most senior position
in the capitalization structure of the borrower, and, in any case, in the
judgment of the Investment Adviser, are in the category of senior debt of
the borrower. Each corporate loan is secured by collateral that the
Investment Adviser believes to have a market value, at the time of the Fund
s investment in the corporate loan, which equals or exceeds the
principal amount of the corporate loan. The Investment Adviser will value
the collateral by methods that may include reference to a borrowers
financial statements, an independent appraiser, comparison to market
comparables or by obtaining the market value of such collateral if it is
readily ascertainable. In the event of a default, however, the ability of
the lender to have access to the collateral may be limited by bankruptcy and
other insolvency laws. The value of the collateral may decline below the
amount
of the corporate loan subsequent to the Funds investment in the loan.
Under certain circumstances, the collateral is released with the consent of
the agent bank and co-lenders or pursuant to the terms of the underlying
credit agreement with the borrower. There is no assurance that the
liquidation of the collateral will satisfy the borrowers obligation in
the event of nonpayment of scheduled interest or principal, or that the
collateral could be readily liquidated. As a result, the Fund might not
receive payments to which it is entitled and thereby may experience a
decline in the value of the investment and, possibly, its net asset
value.
In the case of highly
leveraged loans, a borrower generally is required to pledge collateral that
may include (i) working capital assets, such as accounts receivable and
inventory, (ii) tangible fixed assets, such as real property, buildings and
equipment, (iii) intangible assets, such as trademarks, copyrights and
patent rights and/or (iv) security interests in securities of subsidiaries
or affiliates. Collateral also may include guarantees or other credit
support by subsidiaries or affiliates. In some cases, the only collateral
for the corporate loan is the stock of the borrower and/or its subsidiaries
and affiliates. To the extent such a corporate loan is secured by stock of
the borrower and/or its subsidiaries and affiliates, such stock may lose all
of its value in the event of a bankruptcy or insolvency of the borrower. In
the case of corporate loans to privately held companies, the companies
owners may provide additional credit support in the form of guarantees
and/or pledges of other securities that they own.
In the case of
project finance loans, the borrower is generally a special purpose entity
that pledges undeveloped land and other non-income producing assets as
collateral and obtains construction completion guaranties from third
parties, such as the project sponsor. Project finance credit facilities
typically provide for payment of interest from escrowed funds during a
scheduled construction period, and for the pledge of current and fixed
assets after the project is constructed and becomes operational. During the
construction period, however, the lenders bear the risk that the project
will not be constructed in a timely manner, or will exhaust project funds
prior to completion. In such an event, the lenders may need to take legal
action to enforce the completion guaranties, or may need to lend more money
to the project on less favorable financing terms, or may need to liquidate
the undeveloped project assets. There can be no assurance in any of such
cases that the lenders will recover all of their invested
capital.
The rate of interest
payable on floating or variable rate corporate loans is established as the
sum of a base lending rate plus a specified margin. These base lending rates
generally are the Prime Rate of a designated U.S. bank, LIBOR, the CD rate
or another base lending rate used by commercial lenders. The interest rate
on Prime Rate-based corporate loans floats daily as the Prime Rate changes,
while the interest rate on LIBOR-based and CD-based corporate loans is reset
periodically, typically every 30 days to one year. Certain of the floating
or variable rate corporate loans in which the Fund invests permit the
borrower to select an interest rate reset period of up to one year. A
portion of the Funds portfolio may be invested in corporate loans with
interest rates that are fixed for the term of the loan. Investment in
corporate loans with longer interest rate reset periods or fixed interest
rates may increase fluctuations in the Funds net asset value as a
result of changes in interest rates. However, the Fund attempts to hedge all
of its fixed rate corporate loans against fluctuations in interest rates by
entering into interest rate swap transactions. The Fund has historically
attempted to maintain a portfolio of corporate loans that have a dollar
weighted average period to the next interest rate adjustment of no more than
90 days.
The Fund may receive
and/or pay certain fees in connection with its lending activities. These
fees are in addition to interest payments received and may include facility
fees, commitment fees, amendment and waiver
fees, commissions and prepayment fees. When the Fund buys a corporate loan it
may receive a facility fee, and when it sells a corporate loan, it may pay a
facility fee. In certain circumstances, the Fund may receive a prepayment
fee on the prepayment of a corporate loan by a borrower. In connection with
the acquisition of corporate loans, the Fund also may acquire warrants and
other debt and equity securities of the borrower or its affiliates. The
acquisition of such debt and equity securities will only be incidental to
the Funds purchase of an interest in a corporate loan.
The Fund invests in a
corporate loan only if, in the Investment Advisers judgment, the
borrower can meet debt service on such loan. In addition, the Investment
Adviser will consider other factors deemed by it to be appropriate to the
analysis of the borrower and the corporate loan. Such factors include
financial ratios of the borrower such as pre-tax interest coverage, leverage
ratios, the ratio of cash flows to total debt and the ratio of tangible
assets to debt. In its analysis of these factors, the Investment Adviser
also will be influenced by the nature of the industry in which the borrower
is engaged, the nature of the borrowers assets and the Investment
Advisers assessments of the general quality of the
borrower.
The primary
consideration in selecting such corporate loans for investment by the Fund
is the creditworthiness of the borrower. The Investment Adviser performs its
own independent credit analysis of the borrower in addition to utilizing
information prepared and supplied by the agent bank, co-lender or
participant (each defined below) from whom the Fund purchases its
participation interest in a corporate loan. The Investment Advisers
analysis continues on an ongoing basis for any corporate loans in which the
Fund has invested. Although the Investment Adviser uses due care in making
such analysis, there can be no assurance that such analysis will disclose
factors that may impair the value of the corporate loan.
Corporate loans made
in connection with highly leveraged transactions are subject to greater
credit risks than other corporate loans in which the Fund may invest. These
credit risks include a greater possibility of default or bankruptcy of the
borrower and the assertion that the pledging of collateral to secure the
loan constituted a fraudulent conveyance or preferential transfer which can
be nullified or subordinated to the rights of other creditors of the
borrower under applicable law.
The Fund does not
have a policy with regard to minimum ratings for corporate loans in which it
may invest. Investments in corporate loans are based primarily on the
Investment Advisers independent credit analyses of a particular
borrower. Moreover, the Investment Adviser does not regard the ratings of
other publicly held securities of a borrower to be relevant to its
investment considerations. See AppendixRatings of Securities.
The following table sets forth the percentage of market value, by
Moodys rating category, of the corporate loans held by the Fund as of
August 31, 1999:
Rated
Obligations |
|
77.7% |
(Ba: 44.9%; B: 32.8%) |
|
|
Unrated
Obligations |
|
22.3% |
A borrower also must
comply with various restrictive covenants contained in any credit agreement
between the borrower and the lending syndicate. Such covenants, in addition
to requiring the scheduled payment of interest and principal, may include
restrictions on dividend payments and other distributions to stockholders,
provisions requiring the borrower to maintain specific financial ratios or
relationships, limits on total debt and restrictions on the borrowers
ability to pledge its assets. In addition, the corporate loan agreement may
contain a covenant requiring the borrower to prepay the corporate loan with
any excess cash flow. Excess cash flow generally includes net cash flow
after scheduled debt service payments and permitted
capital expenditures, among other things, as well as the proceeds from asset
dispositions or sales of securities. A breach of a covenant (after giving
effect to any cure period) which is not waived by the agent bank and the
lending syndicate normally is an event of acceleration (i.e., the
agent bank has the right to call the outstanding corporate
loan).
It is expected that a
majority of the corporate loans will have stated maturities ranging from
three to ten years. However, such corporate loans usually require, in
addition to scheduled payments of interest and principal, the prepayment of
the corporate loan from excess cash flow, as discussed above, and may permit
the borrower to prepay at its election. The degree to which borrowers prepay
corporate loans, whether as a contractual requirement or at their election,
may be affected by general business conditions, the financial condition of
the borrower and competitive conditions among lenders, among other factors.
Accordingly, prepayments cannot be predicted with accuracy. Upon a
prepayment, the Fund may receive both a prepayment fee from the prepaying
borrower and a facility fee on the purchase of a new corporate loan with the
proceeds from the prepayment of the former. Such fees may mitigate any
adverse impact on the yield on the Funds portfolio which may arise as
a result of prepayments and the reinvestment of such proceeds in corporate
loans bearing lower interest rates.
Loans to non-U.S.
borrowers or to U.S. borrowers with significant non-U.S. dollar-denominated
revenues may provide for conversion of all or part of the loan from a U.S.
dollar-denominated obligation into a foreign currency obligation at the
option of the borrower. The Fund may invest in corporate loans that were
converted into non-U.S. dollar-denominated obligations only when the
corporate loan facility provides for payments to the lenders in U.S. dollars
pursuant to foreign currency swap arrangements. Foreign currency swaps
involve the exchange by the lenders, including the Fund, with another party
(the counterparty) of the right to receive the currency in which
the loan is denominated for the right to receive U.S. dollars. The Fund will
enter into a transaction subject to a foreign currency swap only if, at the
time of entering into such swap, the outstanding debt obligations of the
counterparty are investment grade (i.e., rated BBB or A-3 or higher
by S&P or Baa or P-3 or higher by Moodys, or determined to be of
comparable quality in the judgment of the Investment Adviser). The amounts
of U.S. dollar payments to be received by the lenders and the foreign
currency payments to be received by the counterparty are fixed at the time
the swap arrangement is entered into. Accordingly, the swap protects the
Fund from fluctuations in exchange rates and locks in the right to receive
payments under the loan in a predetermined amount of U.S. dollars. If there
is a default by the counterparty, the Fund will have contractual remedies
pursuant to the swap arrangements; however, the U.S. dollar value of the Fund
s right to foreign currency payments under the loan will be subject to
fluctuations in the applicable exchange rate to the extent that a
replacement swap arrangement is unavailable or the Fund is unable to recover
damages from the defaulting counterparty. If the borrower defaults on or
prepays the underlying corporate loan, the Fund may be required pursuant to
the swap arrangements to compensate the counterparty to the extent of
fluctuations in exchange rates adverse to the counterparty. In the event of
such a default or prepayment, an amount of cash or liquid securities having
an aggregate net asset value at least equal to the amount of compensation
that must be paid to the counterparty pursuant to the swap arrangements will
be maintained in a segregated account by the Funds
custodian.
Description of Participation Interests
A corporate loan in
which the Fund may invest typically is originated, negotiated and structured
by a syndicate of lenders (co-lenders) consisting of commercial
banks, thrift institutions, insurance companies,
finance companies or other financial institutions one or more of which
administers the Loan on behalf of the syndicate (the agent bank
). Co-lenders may sell corporate loans to third parties called
participants. The Fund invests in a corporate loan either by
participating as a co-lender at the time the loan is originated or by buying
an interest in the corporate loan from a co-lender or a participant.
Co-lenders and participants interposed between the Fund and a borrower,
together with agent banks, are referred to herein as intermediate
participants.
The Fund may invest
in a corporate loan at origination as a co-lender or by acquiring
participations in, assignments of or novations of a corporate loan
(collectively, participation interests). In a novation, the Fund
accepts all of the rights of the intermediate participants in a corporate
loan, including the right to receive payments of principal and interest and
other amounts directly from the borrower and to enforce its rights as a
lender directly against the borrower and assumes all of the obligations of
the intermediate participants, including any obligations to make future
advances to the borrower. As a result, therefore, the Fund has the status of
a co-lender. As an alternative, the Fund may purchase an assignment of all
or a portion of an intermediate participants interest in a corporate
loan, in which case the Fund is required generally to rely on the assigning
lender to demand payment and enforce its rights against the borrower but
would otherwise be entitled to all of such lenders rights in the
corporate loan. The Fund also may purchase a participation in a portion of
the rights of an intermediate participant in a corporate loan by means of a
participation agreement with such intermediate participant. A participation
in the rights of an intermediate participant is similar to an assignment in
that the intermediate participant transfers to the Fund all or a portion of
an interest in a corporate loan. Unlike an assignment, however, a
participation does not establish any direct relationship between the Fund
and the borrower. In such a case, the Fund is required to rely on the
intermediate participant that sold the participation not only for the
enforcement of the Funds rights against the borrower but also for the
receipt and processing of payments due to the Fund under the corporate
loans. The Fund will not act as an agent bank, guarantor, sole negotiator or
sole structuror with respect to a corporate loan.
Because it may be
necessary to assert through an intermediate participant such rights as may
exist against the borrower, in the event the borrower fails to pay principal
and interest when due, the Fund may be subject to delays, expenses and risks
that are greater than those that would be involved if the Fund could enforce
its rights directly against the borrower. Moreover, under the terms of a
participation, the Fund may be regarded as a creditor of the intermediate
participant (rather than of the borrower), so that the Fund may also be
subject to the risk that the intermediate participant may become insolvent.
Similar risks may arise with respect to the agent bank, as described below.
Further, in the event of the bankruptcy or insolvency of the borrower, the
obligation of the borrower to repay the corporate loan may be subject to
certain defenses that can be asserted by such borrower as a result of
improper conduct by the agent bank or intermediate participant. The Fund
invests in corporate loans only if, at the time of investment, the
outstanding debt obligations of the agent bank and any intermediate
participant from whom the Fund purchases a participation interest are
investment grade (i.e., rated BBB or A-3 or higher by S&P or Baa
or P-3 or higher by Moodys, or determined to be of comparable quality
in the judgment of the Investment Adviser).
Because the Fund
regards the issuer of a corporate loan as including the borrower under a
credit agreement, the agent bank and any intermediate participant, the Fund
may be deemed to be concentrated in securities of issuers in the industry
group consisting of financial institutions and their holding companies,
including commercial banks, thrift institutions, insurance companies and
finance companies. As a result, the Fund is subject to certain risks
associated with such institutions. Banking and thrift institutions are
subject to
extensive governmental regulations which may limit both the amounts and types
of loans and other financial commitments that such institutions may make and
the interest rates and fees that such institutions may charge. The
profitability of these institutions is largely dependent on the availability
and cost of capital funds, and has shown significant recent fluctuation as a
result of volatile interest rate levels. In addition, general economic
conditions are important to the operations of these institutions, with
exposure to credit losses resulting from possible financial difficulties of
borrowers potentially having an adverse effect. Insurance companies also are
affected by economic and financial conditions and are subject to extensive
government regulation, including rate regulation. The property and casualty
industry is cyclical, being subject to dramatic swings in profitability
which can be affected by natural catastrophes and other disasters.
Individual companies may be exposed to material risks, including reserve
inadequacy, latent health exposure and inability to collect from their
reinsurance carriers. The financial services area is currently undergoing
relatively rapid change as existing distinctions between financial service
segments become less clear. In this regard, recent business combinations
have included insurance, finance and securities brokerage under single
ownership. Moreover, the Federal laws generally separating commercial and
investment banking are currently being studied by Congress.
In a typical
corporate loan, the agent bank administers the terms of the credit agreement
and is responsible for the collection of principal and interest and fee
payments from the borrower and the apportionment of these payments to the
credit of all lenders which are parties to the credit agreement. The Fund
generally relies on the agent bank or an intermediate participant to collect
its portion of the payments on the corporate loan. Furthermore, the Fund
generally relies on the agent bank to use appropriate creditor remedies
against the borrower. Typically, under credit agreements, the agent bank is
given broad discretion in enforcing the credit agreement, and is obligated
to use only the same care it would use in the management of its own
property. The borrower compensates the agent bank for these services. Such
compensation may include special fees paid on structuring and funding the
corporate loan and other fees paid on a continuing basis.
In the event that an
agent bank becomes insolvent, or has a receiver, conservator, or similar
official appointed for it by the appropriate bank regulatory authority or
becomes a debtor in a bankruptcy proceeding, assets held by the agent bank
under the credit agreement should remain available to holders of corporate
loans. If, however, assets held by the agent bank for the benefit of the
Fund were determined by an appropriate regulatory authority or court to be
subject to the claims of the agent banks general or secured creditors,
the Fund might incur certain costs and delays in realizing payment on a
corporate loan or suffer a loss of principal and/or interest. In situations
involving intermediate participants similar risks may arise, as described
above.
The Fund may have
certain obligations pursuant to a agreement, which may include the
obligation to make future advances to the borrower in connection with
revolving credit facilities in certain circumstances. The Fund currently
intends to reserve against such contingent obligations by segregating
sufficient investments in high quality, short-term, liquid instruments. The
Fund will not invest in corporate loans that would require the Fund to make
any additional investments in connection with such future advances if such
commitments would exceed 20% of the Funds total assets or would cause
the Fund to fail to meet the diversification requirements described under
Investment Objective and Policies.
Illiquid Securities
Certain corporate
loans may not be readily marketable and may be subject to restrictions on
resale. Although the market for corporate loans has developed significantly
during recent years, certain of the
corporate loans in which the Fund invests may not have the liquidity of
conventional debt securities traded in the secondary market and may be
considered illiquid. The Fund has no limitation on the amount of its
investments which are not readily marketable or are subject to restrictions
on resale. Such investments, which may be considered illiquid, may affect
the Funds ability to realize the net asset value in the event of a
voluntary or involuntary liquidation of its assets. To the extent that such
investments are illiquid, the Fund may have difficulty disposing of
portfolio securities in order to purchase shares of its common stock
pursuant to tender offers, if any. The Board of Directors of the Fund will
consider the liquidity of the Funds portfolio securities in
determining whether a tender offer should be made by the Fund. See Net
Asset Value for information with respect to valuation of illiquid
corporate loans.
Other Investment Policies
The Fund has adopted
certain other policies as set forth below:
Borrowing.
The Fund is authorized to borrow money in amounts of
up to 33 1
/3% of the value of its total assets at the time of such borrowings.
Borrowings by the Fund (commonly known as leveraging) create an
opportunity for greater total return but, at the same time, increase
exposure to capital risk. In addition, borrowed funds are subject to
interest costs that may offset or exceed the return earned on the borrowed
funds. See Borrowings by the Fund.
Repurchase
Agreements. The Fund may enter into repurchase
agreements with respect to its permitted investments but currently intends
to do so only with member banks of the Federal Reserve System or with
primary dealers in U.S. Government securities. Under a repurchase agreement
the Fund buys a security at one price and simultaneously promises to sell
that same security back to the seller at a higher price. The Funds
repurchase agreements will provide that the value of the collateral
underlying the repurchase agreement will always be at least equal to the
repurchase price, including any accrued interest earned on the repurchase
agreement, and will be marked to market daily. The repurchase date usually
is within seven days of the original purchase date. Repurchase agreements
are deemed to be loans under the 1940 Act. In all cases, the Investment
Adviser must be satisfied with the creditworthiness of the other party to
the agreement before entering into a repurchase agreement. In the event of
the bankruptcy (or other insolvency proceeding) of the other party to a
repurchase agreement, the Fund might experience delays in recovering its
cash. To the extent that, in the meantime, the value of the securities the
Fund purchases may have declined, the Fund could experience a
loss.
Lending of
Portfolio Securities. The Fund may from time to
time lend securities from its portfolio with a value not exceeding
33
1
/3% of its total assets to banks, brokers and other financial
institutions and receive collateral in cash or securities issued or
guaranteed by the United States Government. Such collateral will be
maintained at all times in an amount equal to at least 100% of the current
market value of the loaned securities. This limitation is a fundamental
policy, and it may not be changed without the approval of the holders of a
majority of the Funds outstanding voting securities, as defined in the
1940 Act. The purpose of such loans is to permit the borrower to use such
securities for delivery to purchasers when such borrower has sold short. If
cash collateral is received by the Fund, it is invested in short-term money
market securities, and a portion of the yield received in respect of such
investment is retained by the Fund. Alternatively, if securities are
delivered to the Fund as collateral, the Fund and the borrower negotiate a
rate for the loan premium to be received by the Fund for lending its
portfolio securities. In either event, the total yield on the Funds
portfolio is increased by loans of its portfolio securities. The Fund will
have the right to regain record ownership of loaned securities to
exercise beneficial rights such as voting rights, subscription rights and
rights to dividends, interest or other distributions. Such loans are
terminable at any time. The Fund may pay reasonable finders,
administrative and custodial fees in connection with such loans. In the
event that the borrower defaults on its obligation to return borrowed
securities, because of insolvency or otherwise, the Fund could experience
delays and costs in gaining access to the collateral and could suffer a loss
to the extent that the value of the collateral falls below the market value
of the borrowed securities.
When Issued and Delayed Delivery
Transactions
The Fund also may
purchase and sell interests in corporate loans and other portfolio
securities on a when issued and delayed delivery
basis. No income accrues to the Fund on such interests or securities in
connection with such transactions prior to the date the Fund actually takes
delivery of such interests or securities. These transactions are subject to
market fluctuation; the value of the interests in corporate loans and other
portfolio debt securities at delivery may be more or less than their
purchase price, and yields generally available on such interests or
securities when delivery occurs may be higher than yields on the interests
or securities obtained pursuant to such transactions. Because the Fund
relies on the buyer or seller, as the case may be, to consummate the
transaction, failure by the other party to complete the transaction may
result in the Fund missing the opportunity of obtaining a price or yield
considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash or liquid securities having an aggregate value equal to the
amount of such purchase commitments until payment is made. The Fund will
make commitments to purchase such interest or securities on such basis only
with the intention of actually acquiring these interests or securities, but
the Fund may sell such interests or securities prior to the settlement date
if such sale is considered to be advisable. To the extent the Fund engages
in when issued and delayed delivery transactions, it
will do so for the purpose of acquiring interests or securities for the Fund
s portfolio consistent with the Funds investment objective and
policies and not for the purpose of investment leverage. No specific
limitation exists as to the percentage of the Funds assets which may
be used to acquire securities on a when issued or delayed
delivery basis.
Interest Rate Hedging Transactions
The Fund may hedge
all or a portion of its portfolio investments against fluctuations in
interest rates by entering into interest rate hedging transactions. While
the Funds use of hedging strategies is intended to further the Fund
s investment objective, there can be no assurance that the Funds
interest rate hedging transactions will be effective. Suitable hedging
instruments may not be available on a timely basis and on acceptable terms.
Furthermore, the Fund has no obligation to enter into interest rate hedging
transactions and may only be engaged in interest rate hedging transactions
from time to time and may not necessarily engage in hedging transactions
when moves in interest rates occur.
Certain Federal
income tax requirements may limit the Funds ability to engage in
interest rate hedging transactions. Gains from transactions in interest rate
hedges distributed to shareholders are taxable as ordinary income or, in
certain circumstances, as long-term capital gains to shareholders. See
Taxes.
The Fund expects to
enter into interest rate hedging transactions primarily to preserve a return
or spread on a particular investment or portion of its portfolio or to
protect against any increase in the price of securities the Fund anticipates
purchasing at a later date. The Fund also attempts to enter into interest
rate hedging transactions to hedge all of its fixed rate corporate loans
against fluctuations in interest rates. The Fund may
enter into interest rate hedges on either an asset-based or liability-based
basis, depending on whether it is hedging its assets or its liabilities.
Typically, the parties with which the Fund enters into interest rate hedging
transactions are broker-dealers and other financial
institutions.
The interest rate
hedging transactions in which the Fund may engage include interest rate
swaps involving the exchange by the Fund with another party of their
respective commitments to pay or receive interest, such as an exchange of
fixed rate payments for floating rate payments. For example, if the Fund
holds a corporate loan with an interest rate that is reset only once each
year, it may swap the right to receive interest at this fixed rate for the
right to receive interest at a rate that is reset every week. This enables
the Fund to offset a decline in the value of the corporate loan due to
rising interest rates, but would also limit its ability to benefit from
falling interest rates. Conversely, if the Fund holds a corporate loan with
an interest rate that is reset every week and it would like to lock in what
it believes to be a high interest rate for one year, it may swap the right
to receive interest at this variable weekly rate for the right to receive
interest at a rate that is fixed for one year. Such a swap would protect the
Fund from a reduction in yield due to falling interest rates, but would
preclude it from taking full advantage of rising interest rates.
The Fund also may
engage in interest rate hedging transactions in the form of purchasing or
selling interest rate caps or floors. The Fund will not sell interest rate
caps or floors that it does not own. The purchase of an interest rate cap
entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (the reference amount with respect to which interest obligations are
determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined interest rate, to receive payments of interest at the
difference of the index and the predetermined rate on a notional principal
amount from the party selling such interest rate floor. The Fund will not
enter into caps or floors if, on a net basis, the aggregate notional
principal amount with respect to such agreements exceeds the net assets of
the Fund.
Inasmuch as these
interest rate hedging transactions are entered into for good faith hedging
purposes, the Investment Adviser believes that such obligations do not
constitute senior securities and, accordingly, will not treat them as being
subject to its borrowing restrictions. The Fund usually enters into interest
rate swaps on a net basis, i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net amount
of the two payments. The net amount of the excess, if any, of the Fund
s obligations over its entitlements with respect to each interest rate
swap will be accrued on a daily basis, and an amount of cash or high grade
liquid debt securities having an aggregate net asset value at least equal to
the accrued excess will be maintained in a segregated account by the Fund
s custodian. If the interest rate swap transaction is entered into on
other than a net basis, the full amount of the Funds obligations will
be accrued on a daily basis, and the full amount of the Funds
obligations will be maintained in a segregated account by the Funds
custodian. The Fund will not enter into any interest rate hedging
transaction unless the Investment Adviser considers the credit quality of
the unsecured senior debt or the claims-paying ability of the other party
thereto to be investment grade. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction but such remedies may be subject to
bankruptcy and insolvency laws which could affect the Funds rights as
a creditor. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals
and as agents utilizing standardized swap documentation. As a result, the
swap market has become
relatively liquid in comparison with other similar instruments traded in the
interbank market. Interest rate caps and floors are more recent innovations
and they are less liquid than swaps. There can be no assurance, however,
that the Fund will be able to enter into interest rate swaps or to purchase
interest rate caps or floors at prices or on terms the Investment Adviser
believes are advantageous to the Fund. In addition, although the terms of
interest rate swaps, caps and floors may provide for termination, there can
be no assurance the Fund will be able to terminate an interest rate swap or
to sell or offset interest rate caps or floors that it has
purchased.
The use of interest
rate hedges is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the Investment Adviser is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would diminish compared with what it
would have been if these investment techniques were not used.
There is no limit on
the amount of interest rate hedging transactions that may be entered into by
the Fund. These transactions do not involve the delivery of securities or
other underlying assets or principal. Accordingly, the risk of loss with
respect to interest rate hedges is limited to the net amount of interest
payments that the Fund is contractually obligated to make. If the corporate
loan underlying an interest rate swap is prepaid and the Fund continues to
be obligated to make payments to the other party to the swap, the Fund would
have to make such payments from another source. If the other party to an
interest rate swap defaults, the Funds risk of loss consists of the
net amount of interest payments that the Fund contractually is entitled to
receive. Since interest rate transactions are individually negotiated, the
Investment Adviser expects to achieve an acceptable degree of correlation
between the Funds rights to receive interest on participation
interests and its rights and obligations to receive and pay interest
pursuant to interest rate swaps.
The Fund may borrow
money representing up to approximately 33 1
/3%, or issue shares of preferred stock representing up to
approximately 50%, of the Funds total assets immediately after such
borrowing or issuance. There can be no assurance, however, that money will
actually be borrowed or that preferred stock representing such percentage of
the Funds capital will actually be issued. Borrowings by the Fund or
the issuance of the preferred stock will result in leveraging of the common
stock. The Fund at times may borrow from affiliates of the Investment
Adviser, provided that the terms of such borrowings are no less favorable
than those available from comparable sources of funds in the marketplace.
Borrowings from an affiliate of the Investment Adviser will result in the
payment of fees and interest on borrowed funds to the affiliate by the Fund.
Borrowings to Finance Tender Offers
The Fund entered into
an agreement with The Bank of New York (BONY), providing for an
unsecured revolving credit facility (the Facility). Unless
otherwise extended, the Facility will terminate on June 19, 2000. The
proceeds of the Facility may be used to finance the payment for Shares
tendered in a tender offer by the Fund and to pay fees and expenses incurred
in connection with the Facility. The Facility enables the Fund to borrow up
to $25,000,000 at a rate of interest equal to, at the Funds option,
the sum of the Federal funds rate (i.e., the rate at which BONY is offered
overnight Federal funds by a Federal funds broker selected by BONY) plus the
applicable margin (as defined below) or the sum of the Eurodollar rate
(based on the rates
quoted by BONY to leading banks in the London interbank eurodollar market as
the rate at which BONY is offering dollar deposits) plus the applicable
margin. The applicable margin means 0.50% per annum. Interest on borrowings
is calculated on the basis of a year of 360 days for the actual number of
days elapsed and is payable in arrears on the last day of each month in the
case of borrowings that bear interest at the Federal funds rate, and at the
end of the interest period selected by the Fund in the case of borrowings
that bear interest at the Eurodollar rate. The Fund agrees to pay to BONY a
fee (the commitment fee) for the period from and including the
effective date to but excluding the date of the expiration or other
termination of the commitment, equal to 0.08% per annum of the unused
portion of the commitment, payable quarterly in arrears on the last day of
each June, September, December and March of each year and on the date of the
expiration or other termination of the commitment. The commitment fee shall
be calculated on the basis of a 360-day year for the actual number of days
elapsed. Each loan must be repaid at the earlier of (i) 90 days from the
borrowing date of such loan or (ii) one business day prior to the date on
which the Funds next tender offer expires. Borrowings under the
Facility, if any, may be repaid with the proceeds of portfolio investments
sold by the Fund subsequent to the expiration date of a tender
offer.
The terms of the
Facility may be modified by written agreement of the parties thereto. The
Facility requires the Fund to maintain a borrowing base (defined as the sum
of the value of all securities held by the Fund (less liabilities) plus the
debt outstanding under the Facility, less non-performing assets) of not less
than 300% of the outstanding principal balance of borrowings under the
Facility and accrued interest. During the term of the Facility, the Fund may
not incur indebtedness except for indebtedness incurred under the Facility,
in hedging transactions, for purchases of securities on short-term credit as
may be necessary for the clearance of sales or purchases of portfolio
securities and for overdrafts extended by the custodian. Additionally,
during the term of the Facility, the Fund is restricted with respect to the
declaration or payment of dividends and the repurchase of shares pursuant to
tender offers. Pursuant to such agreement, as long as certain defaults have
not occurred and are not continuing under the Facility, the Fund may (i)
make its periodic dividend payments to
shareholders in an amount not in excess of its net investment income
(and net realized capital gains not previously distributed to shareholders)
for such period, (ii) distribute each year all of its net investment income
(including net realized capital gains) so that it will not be subject to tax
under the Federal tax laws and (iii) repurchase its shares pursuant to
tender offers.
Other Borrowings
The Fund also may
borrow money to finance the purchase of shares of its common stock pursuant
to tender offers. The Fund also may incur borrowings and/or issue preferred
stock for the purpose of acquiring additional income-producing investments
when the Investment Adviser believes that the interest or dividend payments
and other costs with respect to such borrowings and/or preferred stock
issuance will be exceeded by the anticipated return on such investments. The
amount of any such borrowing or issuance will depend on market or economic
conditions existing at that time. Although the Fund is authorized to borrow
money and/or issue preferred stock to finance the purchase of investments,
it does not currently anticipate doing so.
Capital raised
through leverage will be subject to interest costs or dividend payments
which may or may not exceed the interest on the assets purchased. The Fund
also may be required to maintain minimum average balances in connection with
borrowings or to pay a commitment or other fee to maintain a line of credit;
either of these requirements will increase the cost of borrowing over the
stated interest rate. Certain types of borrowings may result in the Fund
being subject to covenants in credit agreements, including those relating to
asset coverage and portfolio composition requirements and those restricting
the Funds payment of dividends and distributions on the common stock
in certain instances. The issuance of preferred stock involves offering
expenses and other costs and may limit the Funds freedom to pay
dividends on shares of common stock or to engage in other activities.
Borrowings and the issuance of preferred stock having priority over the Fund
s common stock create an opportunity for greater income per share of
common stock, but at the same time such borrowing or issuance is a
speculative technique in that it will increase the Funds exposure to
capital risk. Such risks may be reduced through the use of borrowings and
preferred stock that have floating rates of interest. Unless the income and
appreciation, if any, on assets acquired with borrowed funds or offering
proceeds exceeds the cost of borrowing or issuing additional classes of
securities, the use of leverage will diminish the investment performance of
the Fund compared with what it would have been without leverage.
The Funds
willingness to borrow money and issue new securities for investment
purposes, and the amount it will borrow, will depend on many factors, the
most important of which are investment outlook, market conditions and
interest rates. Successful use of a leveraging strategy depends on the
Investment Advisers ability to predict correctly interest rates and
market movements, and there is no assurance that a leveraging strategy will
be successful during any period in which it is employed.
The following are
fundamental investment restrictions of the Fund and, prior to issuance of
any preferred stock, may not be changed without the approval of the holders
of a majority of the Funds outstanding shares of common stock (which
for this purpose and under the 1940 Act means the lesser of (i) 67% of the
shares of common stock represented at a meeting at which more than 50% of
the outstanding shares of common stock are represented or (ii) more than 50%
of the outstanding shares). Subsequent to the issuance of a class of
preferred stock, the following investment restrictions may not be changed
without the approval of a majority of the outstanding shares of common stock
and of the preferred stock, voting together as a class, and the approval of
a majority of the outstanding shares of preferred stock, voting separately
by class. The Fund may not:
|
1. Borrow money or issue
senior securities, except as permitted by Section 18 of the 1940
Act.
|
|
2. Make investments for the
purpose of exercising control or management.
|
|
3. Purchase securities of
other investment companies, except in connection with a merger,
consolidation, acquisition or reorganization, or by purchase in the open
market of securities of closed-end investment companies where no
underwriters or dealers commission or profit, other than
customary brokers commission, is involved and only if immediately
thereafter not more than 10% of the Funds total assets would be
invested in such securities.
|
|
4. Purchase or sell real
estate; provided that the Fund may invest in securities secured by real
estate or interests therein or issued by companies which invest in real
estate or interests therein.
|
|
5. Underwrite securities of
other issuers except insofar as the Fund may be deemed an underwriter
under the Securities Act of 1933 in selling portfolio
securities.
|
|
6. Make loans to other
persons, except (i) to the extent that the Fund may be deemed to be making
loans by purchasing corporate loans, as a co-lender or otherwise, and
other debt securities and entering into repurchase agreements in
accordance with its investment objective, policies and limitations and
(ii) the Fund may lend its portfolio securities in an amount not in excess
of 33 1
/3% of its total assets, taken at
market value, provided that such loans shall be made in accordance with the
guidelines set forth in this Prospectus.
|
|
7. Invest more than 25% of
its total assets in the securities of issuers in any one industry;
provided that this limitation shall not apply with respect to obligations
issued or guaranteed by the U.S. Government or by its agencies or
instrumentalities; and provided further that the Fund may invest more than
25% and may invest up to 100% of its assets in securities of issuers in
the industry group consisting of financial institutions and their holding
companies, including commercial banks, thrift institutions, insurance
companies and finance companies. For purposes of this restriction, the
term issuer includes the borrower, the agent bank and any
intermediate participant (as defined under Investment Objective and
PoliciesDescription of Participation Interests).
|
|
8. Purchase any securities
on margin, except that the Fund may obtain such short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities.
|
|
9. Make short sales of
securities or maintain a short position or invest in put, call, straddle
or spread options.
|
An additional
investment restriction adopted by the Fund, which may be changed by the
Board of Directors, provides that the Fund may not mortgage, pledge,
hypothecate or in any manner transfer, as security for indebtedness, any
securities owned or held by the Fund except as may be necessary in
connection with hedging techniques involving interest rate transactions,
foreign currency swap transactions relating to non-U.S. dollar-denominated
loans and permitted borrowings by the Fund.
If a percentage
restriction on investment policies or the investment or use of assets set
forth above is adhered to at the time a transaction is effected, later
changes in percentage resulting from changing values will not be considered
a violation.
Because of the
affiliation of Merrill Lynch with the Investment Adviser, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch
except pursuant to an exemptive order or otherwise in compliance with the
provisions of the 1940 Act and the rules and regulations thereunder.
Included among such restricted transactions will be purchases from or sales
to Merrill Lynch of securities in transactions in which it acts as
principal. See Portfolio Transactions.
The Fund has
established procedures for blocking the use of inside information in
securities transactions (commonly referred to as Chinese Wall
procedures). As a result, in relation to other funds managed by the
same portfolio managers as the Fund, if one fund buys a security that is
publicly traded or privately placed, respectively, the other fund may be
deprived of the opportunity to buy a security of the same issuer that is
privately placed or publicly traded, respectively.
The Distributor, an
affiliate of the Investment Adviser, acts as the distributor of shares of
common stock of the Fund. The Fund is engaged in a continuous offering of
its shares of common stock through the Distributor and other securities
dealers that have entered into selected dealer agreements with the
Distributor, including Merrill Lynch. The Fund may, from time to time,
suspend the sale of its shares of common stock. During any
continuous offering of the Funds common stock, shares of the Fund may be
purchased from the Distributor or selected dealers, including Merrill Lynch,
or by mailing a purchase order directly to the Funds Transfer Agent.
Minimum initial and subsequent purchase requirements are:
For Investments in the Fund
Made
|
|
The Minimum
Initial
Purchase
Amount Is
|
|
The Minimum
Subsequent
Purchase
Amount Is
|
Directly through the Fund
s Distributor or Transfer Agent |
|
$1,000 |
|
$50 |
Via 401(k) or 403(b) plans
maintained through Merrill Lynch |
|
None |
|
None |
Via other individual
retirement accounts or other retirement plans
that are not maintained through Merrill Lynch |
|
$ 250 |
|
$ 1 |
The Fund offers its
shares at a public offering price equal to the next determined net asset
value per share without a front-end sales charge. The applicable offering
price for purchase orders is based on the net asset value of the Fund next
determined after receipt of the purchase order by the Distributor. As to
purchase orders received by securities dealers prior to the close of
business on the New York Stock Exchange (generally, the NYSE closes at 4:00
p.m., Eastern time), which includes orders received after the close of
business on the previous day, the applicable offering price is based on the
net asset value determined after the close of business on the NYSE on that
day, provided the Distributor in turn receives the order from the securities
dealer prior to 30 minutes after the close of business on the NYSE on that
day. If the purchase orders are not received by the Distributor prior to 30
minutes after the close of business on the NYSE on that day, such orders are
deemed received on the next business day. Any order may be rejected by the
Distributor or the Fund. The Fund or the Distributor may suspend the
continuous offering of the Funds shares at any time in response to
conditions in the securities markets or otherwise and may thereafter resume
such offering from time to time. Neither the Distributor nor the dealers are
permitted to withhold placing orders to benefit themselves by a price
change. The Distributor is required to advise the Fund promptly of all
purchase orders and cause payments for shares of common stock to be
delivered promptly to the Fund. Merrill Lynch charges its customers a
processing fee (presently $5.35) to confirm a purchase of shares by such
customers. Purchases made directly through the Funds Transfer Agent
are not subject to the processing fee.
Due to the
administrative complexities associated with a continuous offering,
administrative errors may result in the Distributor or an affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5% of the
shares of common stock) of shares of common stock that it may wish to
resell. Such shares of common stock will not be subject to any investment
restriction and may be resold pursuant to this Prospectus.
The Distributor
compensates Merrill Lynch or other selected dealers at a rate of 1.0% of
amounts purchased. In addition, the Distributor compensates Merrill Lynch or
such dealers quarterly at an annual rate equal to 0.75% of the value of Fund
shares that remain outstanding after one year from the date of their
original purchase sold by Merrill Lynch or such dealers. The foregoing
payments made by the Distributor will be made from its own assets or an
affiliates and will not be an expense borne by the Fund. Total
compensation paid to Merrill Lynch, selected dealers and the Distributor,
including the compensation paid at the time of purchase, the quarterly
payments mentioned above and the early withdrawal charge, if any, will not
exceed the applicable limit (presently, 8%), as determined from time to time
by the National Association of Securities Dealers, Inc. For the period March
26, 1999 (commencement of operations) to August 31, 1999, the Distributor
paid $1,565,514 to Merrill Lynch in connection with the sale of shares of
common stock of the Fund.
Upon the transfer of
shares out of a Merrill Lynch brokerage account, an investment account in
the transferring shareholders name may be opened at the Transfer
Agent. Shareholders should be aware that it will not be possible to transfer
their shares from Merrill Lynch to another brokerage firm or financial
institution. Shareholders interested in transferring their brokerage
accounts from Merrill Lynch and who do not wish to have an account
maintained for such shares at the Funds transfer agent must tender the
shares for repurchase by the Fund as described under Tender Offers
so that the cash proceeds can be transferred to the account at the
new firm.
In recognition of the
possibility that a secondary market for the Funds shares will not
exist, the Fund intends to take certain actions that provide liquidity to
shareholders. The Fund intends from time to time to make offers to purchase
its shares of common stock from all beneficial holders at a price per share
equal to the net asset value per share determined at the close of business
on the day tender offer terminates. Commencing with the second quarter of
Fund operations, the Board of Directors has considered making tender offers
on a quarterly basis and the Board of Directors intends to continue this
practice. There can be no assurance, however, that the Board of Directors
will decide to undertake the making of any tender offer. Subject to the Fund
s investment restriction with respect to borrowings, the Fund may
borrow money to finance the repurchase of shares pursuant to any tender
offers. See Borrowings by the Fund and Investment
Restrictions.
The Fund expects that
ordinarily there will be no secondary market for the Funds common
stock and that periodic tenders will be the only source of liquidity for
Fund shareholders. Nevertheless, if a secondary market develops for the
common stock of the Fund, the market price of the shares may vary from net
asset value from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the
Fund, especially as it affects the yield on and net asset value of the
common stock of the Fund. A tender offer for shares of common stock of the
Fund at net asset value is expected to reduce any spread between net asset
value and market price that may otherwise develop. However, there can be no
assurance that such action would result in the Funds common stock
trading at a price which equals or approximates net asset value.
Although the Board of
Directors believes that the tender offers generally are beneficial to
shareholders, the acquisition of shares of common stock by the Fund will
decrease the total assets of the Fund. Tender offers are therefore likely to
increase the Funds expense ratio (assuming such acquisition is not
offset by the issuance of additional shares of common stock). Furthermore,
to the extent the Fund borrows to finance the making of tender offers,
interest on such borrowings reduce the Funds net investment
income.
It is the Board
s announced policy, which may be changed by the Board, not to purchase
shares pursuant to a tender offer if (1) such purchases would impair the Fund
s status as a regulated investment company under the Federal tax laws
(which would cause the Funds income to be taxed at the corporate level
in addition to the taxation of shareholders who receive dividends from the
Fund); (2) the Fund would not be able to liquidate portfolio securities in a
manner which is orderly and consistent with the Funds investment
objective and policies in order to purchase common stock tendered pursuant
to the tender offer; or (3) there is, in the Boards judgment, any (a)
legal action or proceeding instituted or threatened challenging the tender
offer or otherwise materially adversely affecting the Fund, (b) declaration
of a banking moratorium by Federal or state authorities or any suspension of
payment by banks in the United States or New York State, which is material
to the Fund,
(c) limitation imposed by Federal or state authorities on the extension of
credit by lending institutions, (d) commencement of war, armed hostilities
or other international or national calamity directly or indirectly involving
the United States which is material to the Fund, or (e) other event or
condition which would have a material adverse effect on the Fund or its
shareholders if shares of common stock tendered pursuant to the tender offer
were purchased. Thus, there can be no assurance that the Board will proceed
with any tender offer. The Board of Directors may modify these conditions in
light of circumstances existing at the time. If the Board of Directors
determines to purchase the Funds shares of common stock pursuant to a
tender offer, such purchases could reduce significantly the asset coverage
of any borrowing or outstanding senior securities. The Fund may not purchase
shares of common stock to the extent such purchases would result in the
asset coverage with respect to such borrowing or senior securities being
reduced below the asset coverage requirement set forth in the 1940 Act.
Accordingly, in order to purchase all shares of common stock tendered, the
Fund may have to repay all or part of any then outstanding borrowing or
redeem all or part of any then outstanding senior securities to maintain the
required asset coverage. See Borrowings by the Fund. In
addition, the amount of shares of common stock for which the Fund makes any
particular tender offer may be limited for the reasons set forth above or in
respect of other concerns related to liquidity of the Funds
portfolio.
In the event that
circumstances arise under which the Fund does not conduct the tender offers
regularly, the Board of Directors will consider alternative means of
providing liquidity for holders of common stock. Such action would include
evaluating any secondary market that then exists and determining whether
such market provides liquidity for shareholders. If the Board of Directors
determines that such market, if any, fails to provide liquidity for the
holders of common stock, the Board plans to consider alternatives to
providing such liquidity. Among the alternatives that the Board of Directors
may consider is the listing of the Funds common shares on a major
domestic stock exchange or on the Nasdaq National Market. The Board of
Directors also may consider causing the Fund to repurchase its shares from
time to time in open-market or private transactions when it can do so on
terms that represent a favorable investment opportunity. In any event, the
Board of Directors will cause the Fund to take whatever action it deems
necessary or appropriate to provide liquidity for the shareholders in light
of the facts and circumstances existing at such time.
Consummating a tender
offer may require the Fund to liquidate portfolio securities, and realize
gains or losses, at a time when the Investment Adviser would otherwise
consider it disadvantageous to do so.
Each tender offer is
made and shareholders are notified in accordance with the requirements of
the Securities Exchange Act of 1934 and the 1940 Act, either by publication
or mailing or both. The offering documents contain information prescribed by
such laws and the rules and regulations promulgated thereunder. The
repurchase of tendered shares by the Fund is a taxable event. See
Taxes. The Fund pays all costs and expenses associated with the
making of any tender offer. An early withdrawal charge is imposed on most
shares accepted for tender that have been held for less than one year. See
Early Withdrawal Charge. In addition, Merrill Lynch charges its
customers a processing fee (presently $5.35) to confirm a repurchase of
shares from such customers pursuant to a tender offer. Tenders made directly
through the Funds Transfer Agent are not subject to the processing
fee.
MUTUAL FUND INVESTMENT OPTION
Shareholders have an
investment option consisting of the right to reinvest the net proceeds from
a sale of shares (the Original Shares) in a tender offer by the
Fund in Class C shares of certain Merrill Lynch-
sponsored open-end funds (Eligible Class C Shares) at their net
asset value, without the imposition of any contingent deferred sales charge
upon any subsequent redemption of Eligible Class C Shares, if the conditions
set forth below are satisfied. First, net proceeds from the sale of the
Original Shares in the tender offer must be immediately reinvested in
Eligible Class C Shares. Second, the investment option is available only
with respect to the proceeds of shares as to which no early withdrawal
charge is applicable. Eligible Class C Shares are subject to an ongoing
account maintenance fee and an ongoing distribution fee. Before taking
advantage of this investment option, shareholders should obtain a currently
effective prospectus of the fund in which they intend to invest and should
consult their Merrill Lynch Financial Consultant.
An early withdrawal
charge to recover distribution expenses incurred by the Distributor is
charged against the shareholders investment account and paid to the
Distributor in connection with most shares of common stock held for less
than one year which are repurchased pursuant to a tender offer. The early
withdrawal charge is imposed on those shares accepted for tender based on an
amount equal to the lesser of the then current net asset value or the cost
of the shares. Accordingly, the early withdrawal charge is not imposed on
increases in the net asset value above the initial purchase price. In
addition, the early withdrawal charge is not imposed on shares acquired by
reinvesting dividends or capital gains distributions. In determining whether
an early withdrawal charge is payable, it is assumed that the acceptance of
an offer to repurchase pursuant to a tender offer would be made from the
earliest purchase of shares of common stock. The early withdrawal charge
imposed, if any, varies depending on the length of time the common stock has
been owned since purchase (separate purchases shall not be aggregated for
these purposes), as set forth in the following table:
Year of Repurchase After
Purchase
|
|
Early
Withdrawal
Charge
|
First |
|
1.0% |
Second and
following |
|
0.0% |
In determining
whether an early withdrawal charge is applicable to a tender of shares of
common stock, the calculation is determined in the manner that results in
the lowest possible amount being charged. Therefore, it is assumed that the
shareholder first tenders shares held for over one year and shares acquired
by reinvesting dividends or distributions. The Fund waives the early
withdrawal charge on shares tendered following the death of all beneficial
owners of such shares, provided the shares are tendered within one year of
death (a death certificate and other applicable documents may be required).
At the time of tender, the record or succeeding beneficial owner must notify
the Transfer Agent either directly or indirectly through the Distributor
that the early withdrawal charge should be waived. Upon confirmation of the
owners entitlement, the waiver will be granted; otherwise, the waiver
will be lost.
Example:
Assume an investor
purchased 1,000 shares of common stock (at a cost of $10,000) and six months
after purchase, the net asset value per share is $10.05 and, during the six
months period, the investor has acquired 30 additional shares of common
stock upon dividend reinvestment. If the investor first tenders 500 shares
at this time (proceeds of $5,025), 30 shares will not be subject to the
early withdrawal charge because they were acquired by dividend reinvestment.
With respect to the remaining 470 shares, the early withdrawal charge is
applied only to the original cost of $10 per share (and not to the increase in
net asset value of $0.05 per share). Therefore, $4,700 of the $5,025
repurchase proceeds will be charged at a rate of 1.0%. For the period March
26, 1999 (commencement of operations) to August 31, 1999, the amount of
early withdrawal charge paid to the Distributor aggregated
$30,209.67.
Information about the
Directors, executive officers and portfolio manager of the Fund, including
their ages and their principal occupations for at least the last five years,
is set forth below. Unless otherwise noted, the address of the portfolio
managers and each Director and executive officer is P.O. Box 9011,
Princeton, New Jersey 08536-9011.
TERRY
K. GLENN
(59)President and Director(1)(2)Executive Vice President of
the Investment Adviser and its affiliate, Fund Asset Management, L.P. (
FAM) (which terms as used herein include their corporate
predecessors), since 1983; President of Princeton Funds Distributor, Inc. (
PFD) since 1986 and Director thereof since 1991; Executive Vice
President and Director of Princeton Services, Inc. (Princeton Services
) since 1993; President of Princeton Administrators, L.P. since
1988.
RONALD
W. FORBES
(59)Director(2)1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989; Consultant, Urban Institute, Washington, D.C.
since 1995.
CYNTHIA
A. MONTGOMERY
(47)Director(2)Harvard Business School, Soldiers Field
Road, Boston, Massachusetts 02163. Professor, Harvard Business School since
1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate
School of Business Administration, The University of Michigan from 1979 to
1985; Director, UNUM Corporation since 1990 and Director of Newell Co. since
1995.
CHARLES
C. REILLY
(68)Director(2)9 Hampton Harbor Road, Hampton Bays, New
York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior
Vice President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990;
Adjunct Professor, Columbia University Graduate School of Business from 1990
to 1991; Adjunct Professor, Wharton School, The University of Pennsylvania
from 1989 to 1990.
KEVIN
A. RYAN
(67)Director(2)127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and Director Emeritus of The Boston University
Center for the Advancement of Ethics and Character and Director thereof
until 1999; Professor until 1999 and currently Professor Emeritus of
Education at Boston University since 1982; Formerly taught on the faculties
of The University of Chicago, Stanford University and Ohio State
University.
RICHARD
R. WEST
(61)Director(2)Box 604, Genoa, Nevada 89411. Professor of
Finance since 1984, and Dean from 1984 to 1993, and currently Dean Emeritus
of New York University, Leonard N. Stern School of Business Administration;
Director of Bowne & Co., Inc., Vornado Realty Trust, Inc., Vornado
Operating Company and Alexanders Inc.
ARTHUR
ZEIKEL
(67)Director(1)(2)300 Woodland Avenue, Westfield, New
Jersey 07090. Chairman of the Investment Adviser and FAM from 1997 to 1999
and President thereof from 1977 to 1997; Chairman of
Princeton Services from 1997 to 1999, Director thereof from 1997 to 1999 and
President thereof from 1993 to 1997; Executive Vice President of Merrill
Lynch & Co., Inc. (ML & Co.) from 1990 to
1999.
JOSEPH
T. MONAGLE
, JR
. (51)Senior Vice President(1)(2)Senior Vice President of
the Investment Adviser and FAM since 1990; Department Head of the Global
Fixed Income Division of the Investment Adviser and FAM since 1997; Senior
Vice President of Princeton Services since 1993.
RICHARD
C. KILBRIDE
(43)Vice President and Portfolio Manager(1)(2)First Vice
President of the Investment Adviser since 1999; Managing Director of Merrill
Lynch Mercury Asset Management and Hotchkis and Wiley from 1997 to 1999;
Managing Director of Global Fixed Income at Merrill Lynch Global Asset
Management, Ltd., from 1995 to 1997; Vice President of the Investment
Adviser from 1990 to 1995.
GILLES
MARCHAND
(34)Vice President and Portfolio Manager(1)(2)Vice
President of the Investment Adviser since 1997; Credit Analyst at the
Investment Adviser from 1996 to 1997; Security Analyst at Massachusetts
Mutual Insurance Company from 1990 to 1996.
PAUL
TRAVERS
(39)Vice President and Portfolio Manager(1)(2)Director of
the Investment Adviser since 1999; Vice President of the Investment Adviser
from 1998 to 1999; Head of U.S. Corporate Banking at BHF-BANK New York
Branch from 1993 to 1998.
DONALD
C. BURKE
(39)Vice President and Treasurer(1)(2)Senior Vice President
and Treasurer of the Investment Adviser and FAM since 1999; Senior Vice
President and Treasurer of Princeton Services since 1997; Vice President of
PFD since 1999; First Vice President of the Investment Adviser and FAM from
1997 to 1999; Vice President of the Investment Adviser from 1990 to 1997 and
Director of Taxation of the Investment Adviser since 1990.
BRADLEY
J. LUCIDO
(34)Secretary(1)(2)Vice President of MLAM since 1999;
attorney with MLAM since 1995; attorney in private practice from
1991-1995.
(1)
|
Interested person, as
defined in the 1940 Act, of the Fund.
|
(2)
|
Such Director or officer
is a director, trustee, officer or member of the advisory board of certain
other investment companies for which the Investment Adviser or FAM acts as
investment adviser.
|
As of November 1,
1999, the Directors and Officers of the Fund as a group (13 persons) owned
an aggregate of less than 1% of the outstanding common stock of the Fund. As
of such date, Mr. Glenn, an officer and Director of the Fund, and the other
officers of the Fund, owned less than 1% of the outstanding stock of ML
& Co.
Compensation of Directors
Pursuant to its
investment advisory agreement with the Fund (the Investment Advisory
Agreement), the Investment Adviser pays all compensation of officers
and employees of the Fund as well as the fees of all Directors of the Fund
who are affiliated persons of ML & Co. or its subsidiaries. The Fund
pays each Director not interested with the Investment Adviser (each a
non-interested Director) a fee of $3,000 per year plus $300 per
meeting attended and pays all Directors actual out-of-pocket expenses
relating to attendance at meetings. The Fund also pays members of the Board
s Audit and Nominating Committee (the Committee), which
consists of all of the non-affiliated Directors, an annual fee of $900. The
Chairman of the Committee receives an additional annual fee of $1,000. For
the period March 26, 1999 (commencement of operations) to August 31, 1999,
fees and expenses paid to the non-interested Directors that were allocated
to the Fund aggregated $23,639.
The following table
sets forth the compensation earned by the non-interested Directors for the
Fund for the period March 26, 1999 to August 31, 1999, and the aggregate
compensation paid to non-interested Directors from all registered investment
companies advised by the Investment Adviser and its affiliate FAM (
MLAM/FAM Advised Funds) for the calendar year ended December 31,
1998.
Name of Director
|
|
Compensation
from Fund
|
|
Pension or Retirement
Benefits Accrued as Part
of Fund Expense
|
|
Aggregate
from Fund and
MLAM/FAM Advised
Funds Paid to
Directors(1)
|
Ronald W.
Forbes |
|
$4,800 |
|
None |
|
$192,567 |
Cynthia A.
Montgomery |
|
$4,800 |
|
None |
|
$192,567 |
Charles C.
Reilly |
|
$5,800 |
|
None |
|
$362,852 |
Kevin A. Ryan |
|
$4,800 |
|
None |
|
$192,567 |
Richard R. West |
|
$4,800 |
|
None |
|
$346,125 |
(1)
|
The Directors serve on the
Boards of other MLAM/FAM Advised Funds as follows: Mr. Forbes (42
registered investment companies consisting of 55 portfolios); Ms.
Montgomery (42 registered investment companies consisting of 55
portfolios); Mr. Reilly (60 registered investment companies consisting of
73 portfolios); Mr. Ryan (42 registered investment companies consisting of
55 portfolios); and Mr. West (62 registered investment companies
consisting of 86 portfolios).
|
AND ADMINISTRATIVE ARRANGEMENTS
The Investment
Adviser, which is owned and controlled by ML & Co., a financial services
holding company and the parent of Merrill Lynch, provides the Fund with
investment advisory and administrative services. The Merrill Lynch Asset
Management Group (which includes the Investment Adviser) acts as the
investment adviser to more than 100 registered investment companies and
offers investment advisory services to individuals and institutional
accounts. As of September 1999, the Merrill Lynch Asset Management Group had
a total of approximately $514 billion in investment company and other
portfolio assets under management. This amount includes assets managed for
certain affiliates of the Investment Adviser. The Investment Adviser is a
limited partnership, the partners of which are ML & Co. and Princeton
Services, Inc. The principal business address of the Investment Adviser is
800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The Investment
Advisory Agreement provides that, subject to the direction of the Board of
Directors of the Fund, the Investment Adviser is responsible for the actual
management of the Funds portfolio. The responsibility for making
decisions to buy, sell or hold a particular security rests with the
Investment Adviser, subject to review by the Board of Directors.
The Investment
Adviser provides the portfolio management for the Fund. Such portfolio
management will consider analyses from various sources, make the necessary
investment decisions, and place orders for transactions accordingly. The
Investment Adviser also will be responsible for the performance of certain
management services for the Fund. Richard Kilbride, Gilles Marchand and Paul
Travers are the portfolio managers of the Fund and are primarily responsible
for the Funds day-to-day management.
For the services
provided by the Investment Adviser under the Investment Advisory Agreement,
the Fund pays a monthly fee at an annual rate of 0.95% of the Funds
average daily net assets (i.e., the average daily value of the total
assets of the Fund, including proceeds from the issuance of any shares of
preferred stock,
minus the sum of accrued liabilities of the Fund and accumulated dividends on
shares of outstanding preferred stock, if any). For purposes of this
calculation, average daily net assets is determined at the end of each month
on the basis of the average net assets of the Fund for each day during the
month.
Under the terms of an
administration agreement with the Fund (the Administration Agreement
), the Investment Adviser also performs or arranges for the
performance of the administrative services (i.e., services other than
investment advice and related portfolio activities) necessary for the
operation of the Fund, including paying all compensation of and furnishing
office space for officers and employees performing investment and economic
research, trading and investment management for the Fund, as well as the
compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates.
For administrative
services, the Fund pays the Investment Adviser a monthly fee at an annual
rate of 0.40% of the Funds average daily net assets determined in the
same manner as the fee payable by the Fund under the Investment Advisory
Agreement. The combined advisory and administrative fees are greater than
those paid by most funds, but are comparable to those paid by other
continuously offered, closed-end funds investing primarily in corporate
loans.
For the period March
26, 1999 (commencement of operations) to August 31, 1999, the fee paid to
the Investment Adviser pursuant to the Investment Advisory Agreement was
$625,622, and the fee paid pursuant to the Administration Agreement was
$263,423 (based on average daily net assets of approximately $151.1
million).
The Investment
Adviser has entered into a sub-advisory agreement with Merrill Lynch Asset
Management U.K. Limited (MLAM U.K.), an indirect, wholly-owned
subsidiary of ML & Co. and an affiliate of the Investment Adviser,
pursuant to which the Investment Adviser pays MLAM U.K. a fee for providing
investment advisory services to the Investment Adviser with respect to the
Fund in an amount to be determined from time to time by the Investment
Adviser and MLAM U.K. but in no event in excess of the amount that the
Investment Adviser actually receives for providing services to the Fund
pursuant to the Investment Advisory Agreement. MLAM U.K. has offices at 33
King William Street, London EC4 9AS, England. For the period March 26, 1999
(commencement of operations) to August 31, 1999, the Fund paid no fee to
MLAM UK.
The Fund pays all
other expenses incurred in its operations, including, among other things,
legal and auditing expenses, taxes, costs of printing proxies, stock
certificates and shareholder reports, charges of the Custodian and Transfer
Agent, expenses of registering the shares under Federal and state securities
laws, fees and expenses with respect to the issuance of preferred shares or
any borrowing, Securities and Exchange Commission fees, fees and expenses of
non-affiliated Directors, accounting and pricing costs, insurance, interest,
brokerage costs, litigation and other extraordinary or non-recurring
expenses, mailing and other expenses properly payable by the Fund.
Accounting services are provided to the Fund by the Investment Adviser, and
the Fund reimburses the Investment Adviser for its costs in connection with
such services. For the period March 26, 1999 (commencement of operations) to
August 31, 1999, the reimbursement for such services aggregated
$802,357.
The Investment
Adviser is a limited partnership, the partners of which are ML & Co. and
Princeton Services. ML & Co. and Princeton Services are
controlling persons of the Investment Adviser as defined under
the 1940 Act because of their ownership of its voting securities and their
power to exercise a controlling influence over its management or policies.
Similarly, the following entities may be considered controlling
persons of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.s
parent), a subsidiary of Merrill Lynch International Holdings, Inc., a
subsidiary of Merrill Lynch International, Inc., a subsidiary of ML &
Co.
Unless earlier
terminated as described below, the Investment Advisory and Administration
Agreements will remain in effect for a period of two years from the date of
execution and will remain in effect from year to year thereafter if approved
annually (a) by the Board of Directors of the Fund or by a majority of the
outstanding shares of the Fund and (b) by a majority of the Directors who
are not parties to such contract or interested persons (as defined in the
1940 Act) of any such party. Such contracts are not assignable and may be
terminated without penalty on 60 days written notice at the option of
either party thereto or by the vote of the shareholders of the
Fund.
Securities held by
the Fund, including corporate loans, may also be held by, or be appropriate
investments for, other funds or investment advisory clients for which the
Investment Adviser or its affiliates act as an adviser. Because of different
objectives or other factors, a particular security may be bought for an
advisory client when other clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the Fund or
other funds for which it acts as investment adviser or for advisory clients
arise for consideration at or about the same time, transactions in such
securities will be made, insofar as feasible, for the respective funds and
clients in a manner deemed equitable to all. Transactions effected by the
Investment Adviser (or its affiliate) on behalf of more than one of its
clients during the same period may increase the demand for securities being
purchased or the supply of securities being sold, causing an adverse effect
on price.
Code of Ethics
The Board of
Directors of the Fund has adopted a Code of Ethics under Rule 17j-1 of the
1940 Act which incorporates the Code of Ethics of the Investment Adviser
(together, the Codes). The Codes significantly
restrict the personal investing activities of all employees of the Investment
Adviser and, as described below, impose additional, more onerous,
restrictions on Fund investment personnel.
The Codes require
that all employees of the Investment Adviser preclear any personal
securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are
designed to identify any substantive prohibition or limitation applicable to
the proposed investment. The substantive restrictions applicable to all
employees of the Investment Adviser include a ban on acquiring any
securities in a hot initial public offering and a prohibition
from profiting on short-term trading in securities. In addition, no employee
may purchase or sell any security which at the time is being purchased or
sold (as the case may be), or to the knowledge of the employee is being
considered for purchase or sale, by any fund advised by the Investment
Adviser. Furthermore, the Codes provide for trading blackout periods
which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or
30 days depending upon the transaction).
Subject to policies
established by the Board of Directors of the Fund, the Investment Adviser is
primarily responsible for the execution of the Funds portfolio
transactions. In executing such transactions, the Investment Adviser seeks
to obtain the best results for the Fund, taking into account such factors as
price
(including the applicable fee, commission or spread), size of order,
difficulty of execution and operational facilities of the firm involved and
the firms risk in positioning a block of securities. While the
Investment Adviser generally seeks reasonably competitive fee or commission
rates, the Fund does not necessarily pay the lowest commission or spread
available.
The Fund purchases
corporate loans in individually negotiated transactions with commercial
banks, thrifts, insurance companies, finance companies and other financial
institutions. In selecting such financial institutions, the Investment
Adviser may consider, among other factors, the financial strength,
professional ability, level of service and research capability of the
institution. See Investment Objective and PoliciesDescription of
Participation Interests. While such financial institutions generally
are not required to repurchase Participation Interests in corporate loans
which they have sold, they may act as principal or on an agency basis in
connection with the Funds disposition of corporate loans.
The Fund has no
obligation to deal with any bank, broker or dealer in execution of
transactions in portfolio securities. Subject to providing the best price
and execution, securities firms that provide investment research to the
Investment Adviser, including Merrill Lynch, may receive orders for
transactions by the Fund. Research information provided to the Investment
Adviser by securities firms is supplemental. It does not replace or reduce
the level of services performed by the Investment Adviser and the expenses
of the Investment Adviser will not be reduced.
The Fund invests in
securities traded primarily in the over-the-counter markets, and the Fund
intends to deal directly with dealers who make markets in the securities
involved, except in those circumstances where better prices and execution
are available elsewhere. Under the 1940 Act, except as permitted by
exemptive order, persons affiliated with the Fund, including Merrill Lynch,
are prohibited from dealing with the Fund as principal in the purchase and
sale of securities. Since transactions in the over-the-counter market
usually involve transactions with dealers acting as principal for their own
account, the Fund does not deal with Merrill Lynch and its affiliates in
connection with such transactions. See Investment Restrictions.
An affiliated person of the Fund may serve as its broker in over-the-counter
transactions conducted on an agency basis.
Portfolio Turnover
The Fund may dispose
of securities without regard to the length of time they have been held when
such actions, for defensive or other reasons, appear advisable to the
Investment Adviser. While it is not possible to predict turnover rates with
any certainty, presently it is anticipated that the Funds annual
portfolio turnover rate, under normal circumstances, should be less than
100%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by
the monthly average value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this rate,
all securities whose maturities at the time of acquisition are one year or
less are excluded.) A high portfolio turnover rate bears certain tax
consequences and results in greater transaction costs, which are borne
directly by the Fund.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to
distribute all its net investment income. Dividends from such net investment
income are declared daily and paid monthly to holders of common stock.
Monthly distributions to holders of common
stock consist of substantially all net investment income remaining after the
payment of interest on any borrowing or dividends or interest on any senior
securities from and after any borrowing or issuance of senior securities.
For Federal tax purposes, the Fund is required to distribute substantially
all of its net investment income for each calendar year. All net realized
capital gains, if any, are distributed at least annually to holders of
common stock. Shares of common stock accrue dividends as long as they are
issued and outstanding. Shares of common stock are issued and outstanding
from the settlement date of a purchase order to the settlement date of a
tender offer. The Fund has entered into an agreement providing for an
unsecured revolving credit facility that contains restrictions on the
payment of dividends by the Fund. For a description of such restrictions see
Borrowings by the Fund.
Under the 1940 Act,
the Fund may not declare any dividend or other distribution upon any class
of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be. Also, certain types of
borrowings may result in the Fund being subject to covenants in credit
agreements, including those relating to asset coverage and portfolio
composition requirements and those restricting the Funds payment of
dividends and distributions.
While any shares of
preferred stock are outstanding, the Fund may not declare any cash dividend
or other distribution on its common stock, unless at the time of such
declaration, (1) all accumulated preferred stock dividends have been paid
and (2) the net asset value of the Funds portfolio (determined after
deducting the amount of such dividend or other distribution) is at least
200% of the liquidation value of the outstanding preferred stock (expected
to be equal to original purchase price per share plus any accumulated and
unpaid dividends thereon). This limitation, and the limitations contained in
the preceding paragraph, on the Funds ability to pay dividends or make
distributions on its common stock could under certain circumstances impair
the ability of the Fund to maintain its qualification for taxation as a
regulated investment company, which would have an adverse impact on
shareholders. See Borrowings by the Fund and Taxes.
See Automatic
Dividend Reinvestment Plan for information concerning the manner in
which dividends and distributions to holders of common stock may be
automatically reinvested in shares of common stock of the Fund. Dividends
and distributions are taxable to shareholders whether they are reinvested in
shares of the Fund or received in cash (provided that, in the event that a
payment on an account maintained at the Transfer Agent would amount to $10
or less, a shareholder will not receive such payment in cash and such
payment will be automatically invested in additional shares).
General
The Fund intends to
continue to qualify for the special tax treatment afforded regulated
investment companies (RICs) under the Internal Revenue Code of
1986, as amended (the Code). If it so qualifies, in any taxable
year in which it distributes at least 90% of its net income (see below), the
Fund will not be subject to Federal income tax to the extent that it
distributes its net investment income and net realized capital gains. The
Fund intends to distribute substantially all of its net investment income
and net capital gains.
Dividends paid by
the Fund from its ordinary income or from an excess of net short-term
capital gains over net long-term capital losses (together referred to
hereafter as ordinary income dividends) are taxable to
shareholders as ordinary income. Distributions, if any, from the excess of
net long-term capital gains over net short-term capital losses derived from
the sale of securities or from certain transactions in interest rate swaps (
capital gain dividends) are taxable as long-term capital gains,
regardless of the length of time the shareholder has owned Fund shares.
Certain categories of capital gains are taxable at different rates.
Generally not later than 60 days after the close of its taxable year, the
Fund will provide its shareholders with a written notice designating the
amount of any capital gain dividends as well as any amounts of capital gain
dividends in the different categories of capital gain referred to above. Any
loss upon the sale or exchange of Fund shares held for six months or less is
treated as long-term capital loss to the extent of any capital gain
dividends received by the shareholder. Distributions in excess of the Fund
s earnings and profits first reduce the adjusted tax basis of a holder
s common stock and, after such adjusted tax basis is reduced to zero,
constitute capital gains to such holder (assuming such common stock is held
as a capital asset).
Dividends are taxable
to shareholders even though they are reinvested in additional shares of the
Fund. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in
January which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months, then such
dividend is treated for tax purposes as being paid and received on December
31 of the year in which the dividend was declared.
The IRS has taken the
position in a revenue ruling that if a RIC has two or more classes of
shares, it may designate distributions made to each class in any year as
consisting of no more than such classs proportionate share of
particular types of income, including the different categories of capital
gains, discussed above. A classs proportionate share of a particular
type of income is determined according to the percentage of total dividends
paid by the RIC during the year that was paid to such class. Consequently,
if both common stock and preferred stock are outstanding, the Fund intends
to designate distributions made to the classes as consisting of particular
types of income in accordance with the classes proportionate shares of
such income. Thus, capital gain dividends as discussed above, will be
allocated among the holders of common stock and any series of preferred
stock in proportion to the total dividends paid to each class during the
taxable year, or otherwise as required by applicable law.
The Code requires a
RIC to pay a nondeductible 4% excise tax to the extent the RIC does not
distribute during each calendar year 98% of its ordinary income, determined
on a calendar year basis, and 98% of its capital gains, determined, in
general, on an October 31 year end, plus certain undistributed amounts from
previous years. While the Fund intends to distribute its income and capital
gains in the manner necessary to minimize imposition of the 4% excise tax,
there can be no assurance that sufficient amounts of the Funds taxable
income and capital gains will be distributed to avoid entirely the
imposition of the tax. In such event, the Fund will be liable for the tax
only on the amount by which it does not meet the foregoing distribution
requirements.
Under the terms of
the revolving credit facility, the Fund may be restricted with respect to
the declaration and payment of dividends in certain circumstances. See
Borrowings by the Fund. Additionally, if at any time when
borrowings or shares of preferred stock are outstanding the Fund does not
meet the asset coverage requirements of the 1940 Act or applicable credit
agreements, the Fund will be required to suspend distributions to holders of
common stock until the asset coverage is restored. See Dividends and
Distributions. Limits on the Funds payment of dividends may
prevent the Fund from distributing at least 90% of its net income and may
therefore jeopardize the Funds qualification for taxation as a RIC
and/or may subject the Fund to the 4% Federal excise tax described above as
well as income tax on any retained ordinary income or capital gains. Upon
any failure to meet the asset coverage requirement of the 1940 Act or
applicable credit agreements, the Fund may, in its sole discretion, repay
borrowings or redeem shares of preferred stock in order to maintain or
restore the requisite asset coverage and avoid the adverse consequences to
the Fund and its shareholders of failing to qualify as a RIC. There can be
no assurance, however, that any such action would achieve these objectives.
The Fund will endeavor to avoid restriction of its dividend payments under
the Facility.
As noted above, the
Fund must distribute annually at least 90% of its net investment income. A
distribution will only be counted for this purpose if it qualifies for the
dividends paid deduction under the Code. Some types of preferred stock that
the Fund has the authority to issue may raise a question as to whether
distributions on such preferred stock are preferential under the
Code and therefore not eligible for the dividends paid deduction. The Fund
intends to rely on the advice of its counsel on questions raised by issuance
of these types of preferred stock. Moreover, the Fund intends to issue
preferred stock that counsel advises or the IRS has ruled will not result in
the payment of preferential dividends. If the Fund ultimately relies solely
on a legal opinion on issuance of such preferred stock, there is no
assurance that the IRS would agree that dividends on the preferred stock are
not preferential. If the IRS successfully disallowed the dividends paid
deduction for dividends on the preferred stock, the Fund could lose the
benefit of the special treatment afforded RICs under the Code.
The Federal income
tax rules governing the taxation of interest rate swaps are not entirely
clear and may require the Fund to treat payments received under such
arrangements as ordinary income and to amortize payments under certain
circumstances. Additionally, because the treatment of swaps under the RIC
qualification rules is also not clear, the Fund will limit its activity in
this regard in order to maintain its qualification as a RIC.
Under certain Code
provisions, some shareholders may be subject to a 31% withholding tax on
ordinary income dividends, capital gain dividends and redemption payments (
backup withholding). Generally, shareholders subject to backup
withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the Funds knowledge, have
furnished an incorrect number. When establishing an account, an investor
must certify under penalty of perjury that such number is correct and that
such investor is not otherwise subject to backup withholding
tax.
Ordinary income
dividends paid to shareholders who are nonresident aliens or foreign
entities will be subject to a 30% United States withholding tax under
existing provisions of the Code applicable to foreign individuals and
entities unless a reduced rate of withholding or a withholding exemption is
provided under applicable treaty law. Nonresident shareholders are urged to
consult their own tax advisers concerning the applicability of the United
States withholding tax.
Interest income from
non-U.S. securities may be subject to withholding and other taxes imposed by
the country in which the issuer is located. Tax conventions between certain
countries and the United States may reduce or eliminate such
taxes.
A loss realized on a
sale or exchange of shares of the Fund will be disallowed if other Fund
shares are acquired (whether through the automatic reinvestment of dividends
or otherwise) within a 61-day period beginning 30 days before and ending 30
days after the date that the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed
loss.
Offers to Purchase Shares
Under current law, a
shareholder who, pursuant to any tender offer, tenders all of his or her
shares and who, after such tender offer, is not considered to own any shares
under attribution rules contained in the Code will realize a taxable gain or
loss depending upon such shareholders basis in the shares. Such gain
or loss will be treated as capital gain or loss if the shares are held as
capital assets. Different tax consequences may apply to tendering and
nontendering shareholders in connection with a tender offer, and these
consequences will be disclosed in the related offering documents. For
example, if a shareholder tenders less than all shares owned by or
attributed to such shareholder, and if the distribution to such shareholder
does not otherwise qualify as a sale or exchange, the proceeds received will
be treated as a taxable dividend, a return of capital or capital gain
depending on the Funds earnings and profits and the shareholders
basis in the tendered shares. Also, there is a remote risk that
non-tendering shareholders may be considered to have received a deemed
distribution which may be a taxable dividend in whole or in part.
Shareholders may wish to consult their tax advisers prior to tendering. If
holders of common stock whose shares are acquired by the Fund in the open
market sell less than all shares owned by or attributed to them, a risk
exists that these shareholders will be subject to taxable dividend treatment
and a remote risk exists that the remaining shareholders may be considered
to have received a deemed distribution.
The foregoing is a
general and abbreviated summary of the applicable provisions of the Code and
Treasury Regulations presently in effect. For the complete provisions,
reference should be made to the pertinent Code sections and the Treasury
Regulations promulgated thereunder. The Code and the Treasury Regulations
are subject to change by legislative, judicial, or administrative action
either prospectively or retroactively. Ordinary income and capital gain
dividends may also be subject to state and local taxes.
Shareholders are
urged to consult their tax advisors regarding specific questions as to
Federal, foreign, state or local taxes. Foreign investors should consider
applicable foreign taxes in their evaluation of an investment in the
Fund.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and
capital gains distributions are reinvested automatically in full and
fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A
shareholder may at any time, by request to his Merrill Lynch financial
consultant or by written notification to Merrill Lynch if the shareholder
s account is maintained with Merrill Lynch or by written notification
or by telephone (1-800-MER-FUND) to the Transfer Agent if the shareholder
s account is maintained with the Transfer Agent, elect to have
subsequent dividends or capital gains distributions, or both, paid in cash,
rather than reinvested, in which event payment will be mailed on or about
the payment date (provided that, in the event that a payment on an account
maintained at the Transfer Agent would amount to $10 or less, a
shareholder will not receive such payment in cash and such payment will be
automatically reinvested in additional shares). Cash payments can also be
directly deposited to the shareholders bank account. No early
withdrawal charge will be imposed upon redemption of shares issued as a
result of the automatic reinvestment of dividends or capital gains
distributions. The Fund is not responsible for any failure of delivery to
the shareholders address of record and no interest will accrue on
amounts represented by uncashed distribution or redemption
checks.
The automatic
reinvestment of dividends and distributions does not relieve participants of
any Federal income tax that may be payable (or required to be withheld) on
such dividends or distributions. See Taxes.
The net asset value
per share of common stock is determined Monday through Friday after the
close of business on the NYSE (generally, the NYSE closes at 4:00 p.m.,
Eastern time), on each business day during which the NYSE is open. The NYSE
is not open on New Years Day, Martin Luther King, Jr. Day, Presidents
Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. For purposes of determining the net
asset value of a share of common stock, the value of the securities held by
the Fund plus any cash or other assets (including interest and dividends
accumulated but not yet received) minus all liabilities (including accrued
expenses) and the aggregate liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of common stock
outstanding at such time. Expenses, including the fees payable to the
Investment Adviser, are accrued daily.
Corporate loans will
be valued in accordance with guidelines established by the Board of
Directors. Under the Funds current guidelines, the Fund will utilize
the valuations of corporate loans furnished by an independent third-party
pricing service approved by the Board of Directors. The pricing service
typically values corporate loans for which the pricing service can obtain at
least two price quotations from banks or dealers in corporate loans by
calculating the mean of the last available bid and asked prices in the
market for such corporate loans, and then using the mean of those two means.
For those corporate loans for which the pricing service can obtain one price
quote, the pricing service will value the corporate loan at the mean between
the bid and asked price for such corporate loan. For the limited number of
corporate loans for which no reliable price quotes are available, such
corporate loans will be valued by the pricing service through the use of
pricing matrices to determine valuations. If the pricing service does not
provide a value for a corporate loan, the Investment Adviser will value the
corporate loan at fair value, which is intended to be market value. In
valuing a corporate loan at fair value, the Investment Adviser will
consider, among other factors (i) the creditworthiness of the borrower and
any intermediate participants, (ii) the current interest rate period until
the next interest rate resets and maturity of the corporate loan (iii)
recent prices in the market for similar corporate loans, if any and (iv)
recent prices in the market for instruments of similar quality, rate period
until the next interest rate reset and maturity.
Other portfolio
securities (other than short-term obligations but including listed issues)
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 which are generally
recognized by institutional traders. In certain circumstances, such other
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. The
value of interest rate swaps, caps and floors is determined in accordance
with a formula and then confirmed
periodically by obtaining a bank quotation. Positions in options are valued at
the last sale price on the market where any such option is principally
traded. Obligations with remaining maturities of 60 days or less are valued
at amortized cost unless this method no longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. Rights or
warrants to acquire stock, or stock acquired pursuant to the exercise of a
right or warrant, may be valued taking into account various factors such as
original cost to the Fund, earnings and net worth of the issuer, market
prices for securities of similar issuers, assessment of the issuers
future prosperity, liquidation value or third party transactions involving
the issuers securities. Securities for which there exist no price
quotations or valuations and all other assets are valued at fair value as
determined in good faith by or on behalf of the Board of Directors of the
Fund.
DESCRIPTION OF CAPITAL STOCK
The Fund is
authorized to issue 1,000,000,000 shares of capital stock, par value $.10
per share, all of which shares are initially classified as common stock. The
Board of Directors is authorized, however, to classify and reclassify any
unissued shares of capital stock by setting or changing in any one or more
respects the designation and number of shares of any such class or series,
and the nature, rates, amounts and times at which and the conditions under
which dividends shall be payable on, and the voting, conversion, redemption
and liquidation rights of, such class or series and any other preferences,
rights, restrictions and qualifications applicable thereto.
Shares of common
stock, when issued and outstanding, are fully paid and non-assessable.
Shareholders are entitled to share pro rata in the net assets of the Fund
available for distribution to shareholders upon liquidation of the Fund.
Shareholders are entitled to one vote for each share held.
The Fund does not
currently anticipate issuing preferred stock. However, in the event the Fund
issues preferred stock and so long as any shares of the Funds
preferred stock are outstanding, holders of common stock are not entitled to
receive any net income of or other distributions from the Fund unless all
accumulated dividends on preferred stock have been paid, and unless asset
coverage (as defined in the 1940 Act) with respect to preferred stock would
be at least 200% after giving effect to such distributions. During the term
of the Funds revolving credit facility, the Fund may not issue any
additional capital stock other than common stock. See Borrowings by
the Fund.
The Fund will send
unaudited reports at least semi-annually and audited annual financial
statements to all of its shareholders of record.
The following table
sets forth the authorized shares of the Fund, the number of shares held by
the Fund for its own account and the total number of shares outstanding as
of August 31, 1999, exclusive of that held by the Fund.
Class of Shares
|
|
Amount
Authorized
|
|
Amount Held by
Fund for Own
Account
|
|
Amount Outstanding
August 31, 1999
(Exclusive of
Amount Held by
Fund for Own
Account)
|
Common Stock |
|
1,000,000,000 |
|
|
|
22,924,759 |
Certain Provisions of the Articles of
Incorporation
The Funds
Articles of Incorporation include provisions that could have the effect of
limiting the ability of other entities or persons to acquire control of the
Fund or to change the composition of its Board of Directors and could have
the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party
from seeking to obtain control of the Fund. A Director elected by all
holders of capital stock or by the holders of preferred stock may be removed
from office only for cause by vote of the holders of at least 66 2
/3% of the shares of capital stock or preferred stock, as the case may
be, of the Fund entitled to be voted on the matter.
In addition, the
Articles of Incorporation require the favorable vote of the holders of at
least 66 2
/3% of the Funds shares of capital stock, then entitled to be
voted, voting as a single class, to approve, adopt or authorize the
following:
|
(i) a merger or consolidation or
statutory share exchange of the Fund with other corporations;
|
|
(ii) a sale of all or substantially all
of the Funds assets (other than in the regular course of the Fund
s investment activities); or
|
|
(iii) a liquidation or dissolution of
the Fund,
|
unless such action has been approved, adopted or authorized by the
affirmative vote of two-thirds of the total number of Directors fixed in
accordance with the by-laws, in which case the affirmative vote of a
majority of the Funds shares of capital stock is required. Following
any issuance of preferred stock, it is anticipated that the approval,
adoption or authorization of the foregoing would also require the favorable
vote of a majority of the Funds shares of preferred stock then
entitled to be voted, voting as a separate class.
The Board of
Directors has determined that the 66 2
/3% voting requirements described above, which are greater than the
minimum requirements under Maryland law or the 1940 Act, are in the best
interests of shareholders generally. Reference should be made to the
Articles of Incorporation on file with the Securities and Exchange
Commission for the full text of these provisions.
From time to time the
Fund may include its yield and/or total return for various specified time
periods in advertisements or information furnished to present or prospective
shareholders.
The yield of the Fund
refers to the income generated by an investment in the Fund over a stated
period. Yield is calculated by annualizing the most recent monthly
distribution and dividing the product by the average maximum offering price.
For the period March 26, 1999 (commencement of operations) to August 31,
1999, the Fund earned $0.289 per share income dividends, representing a net
annualized yield of 6.62%, based on a month-end per share net asset value of
$10.01.
The Fund also may
quote annual total return and aggregate total return performance data. Total
return quotations for the specified periods will be computed by finding the
rate of return (based on net investment income and any capital gains or
losses on portfolio investments over such periods) that would equate the
initial amount invested to the redeemable value of such investment at the
end of the period.
For the period March
26, 1999 (commencement of operations) to August 31, 1999, the aggregate
total return of the Fund was 3.02%, based on the change in per share net
asset value from $10.00 to $10.01, and assuming reinvestment of $0.272 per
share income dividends.
The calculation of
yield and total return does not reflect the imposition of any early
withdrawal charges.
Yield and total
return figures are based on the Funds historical performance and are
not intended to indicate future performance. The Funds yield is
expected to fluctuate, and its total return varies depending on market
conditions, the Corporate Loans and other securities comprising the Fund
s portfolio, the Funds operating expenses and the amount of net
realized and unrealized capital gains or losses during the
period.
On occasion, the Fund
may compare its yield to (1) the Prime Rate, quoted daily in The Wall
Street Journal as the base rate on corporate loans at large U.S. money
center commercial banks, (2) the CD rate, quoted daily in The Wall Street
Journal as the average of top rates paid by major New York banks on
primary new issues of negotiable CDs, usually on amounts of $1 million and
more, (3) one or more averages compiled by Donoghues Money Fund
Report, a widely recognized independent publication that monitors the
performance of money market mutual funds, (4) the average yield reported by
the Bank Rate Monitor National Index for money market deposit
accounts offered by the 100 leading banks and thrift institutions in the ten
largest standard metropolitan statistical areas, (5) yield data published by
Lipper Analytical Services, Inc., or (6) the yield on an investment in
90-day Treasury bills on a rolling basis, assuming quarterly compounding. In
addition, the Fund may compare the Prime Rate, the CD rate, the Donoghue
s averages and the other yield data described above to each other.
As with yield quotations, yield comparisons should not be considered
indicative of the Funds yield or relative performance for any future
period.
The Funds
securities and cash are held under a custodial agreement with The Bank of
New York, 90 Washington Street, New York, New York 10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT; SHAREHOLDER REPORTS
The Transfer Agent
for the shares of the Fund is Financial Data Services, Inc., 4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484, a subsidiary of ML &
Co.
The Transfer Agent,
which is a subsidiary of ML & Co., acts as the Funds transfer
agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Shareholder Servicing Agency Agreement (the Transfer Agency Agreement
). Pursuant to the Transfer Agency Agreement, the Transfer Agent is
responsible for the issuance, transfer and tender of shares and the opening
and maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $14.00 per
shareholder account, and is entitled to reimbursement for certain
transaction charges and out-of-pocket expenses incurred by it under the
Agreement. Additionally, a $.20 monthly closed account charge is assessed on
all accounts that close during the calendar year. Application of this fee
commences the month following the month the account is closed and terminates
at the end of the calendar year. For purposes of the Transfer Agency
Agreement, the term account includes a shareholder account
maintained directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the relevant share
class on a recordkeeping system, provided the recordkeeping system is
maintained by a subsidiary of ML & Co. For the period March 26,1999
(commencement of operations) to August 31, 1999, the total fee paid by the
Fund to the Transfer Agent was $21,329.
Shareholder
Reports. Only one copy of each shareholder report
and certain shareholder communications will be mailed to each identified
shareholder regardless of the number of accounts such shareholder has. If a
shareholder wishes to receive separate copies of each report and
communication for each of the shareholders related accounts the
shareholder should notify in writing:
|
Financial Data Services,
Inc.
|
|
Jacksonville, Florida
32232-5289
|
The written
notification should include the shareholders name, address, tax
identification number and Merrill Lynch and/or mutual fund account numbers.
If you have any questions regarding this please call your Merrill Lynch
financial consultant or Financial Data Services, Inc. at (800)
637-3863.
ADDITIONAL INFORMATION
The Fund is subject
to the informational requirements of the 1934 Act and the 1940 Act and in
accordance therewith is required to file reports and other information with
the Commission. Any such reports and other information can be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Regional Office, at Seven
World Trade Center, Suite 1300, New York, New York 10048; Pacific Regional
Office, at 5670 Wilshire Boulevard, 11th Floor, Los Angeles, California
90036; and Midwest Regional Office, at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400. Chicago, Illinois 60661-2511. Copies of such
materials can be obtained from the public reference section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. The Commission maintains a Web site at http://www.sec.gov containing
reports and information statements and other information regarding
registrants, including the Fund, that file electronically with the
Commission.
Additional
information regarding the Fund is contained in the Registration Statement on
Form N-2 including amendments, exhibits and schedules thereto, relating to
such shares filed by the Fund with the Commission in Washington, D.C. This
prospectus does not contain all of the information set forth in the
Registration Statement, including any amendments, exhibits and schedules
thereto. For further information with respect to the Fund and the shares
offered hereby, reference is made to the Registration Statement. Statements
contained in this prospectus as to the contents of any contract or other
document referred to are not necessarily complete and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement being qualified
in all respects by such reference. A copy of the Registration Statement may
be inspected without charge at the Commissions principal office in
Washington, D.C., and copies of all or any part thereof may be obtained from
the Commission upon the payment of certain fees prescribed by the
Commission.
Many computer systems
were designed using only two digits to designate years. These systems may
not be able to distinguish the Year 2000 from the Year 1900 (commonly known
as the Year 2000 Problem).
The Fund could be adversely affected if the computer systems used by Fund
management or other Fund service providers do not properly address this
problem before January 1, 2000. Fund management expects to have addressed
this problem before then, and does not anticipate that the services it
provides will be adversely affected. The Funds other service providers
have told Fund management that they also expect to resolve the Year 2000
Problem, and Fund management will continue to monitor the situation as the
Year 2000 approaches. However, if the problem has not been fully addressed,
the Fund could be negatively affected. The Year 2000 Problem could also have
a negative impact on the issuers of securities in which the Fund invests,
and this could hurt the Funds investment returns.
Certain legal matters
in connection with the common stock offered hereby are passed on for the
Fund by Brown & Wood LLP
, One World Trade Center, New York, New York 10048-0557.
The Funds
audited financial statements are included in its 1999 annual report to
shareholders, which is incorporated by reference in this Prospectus. You may
request a copy of the annual report at no charge by calling 1-800-456-4587
ext. 789 between 8:00 a.m. and 8:00 p.m. on any business day.
Deloitte & Touche
LLP
, Princeton Forrestal Village, 116-300 Village Boulevard, Princeton, New
Jersey 08540-6400, have been selected as the independent auditors of the
Fund. The selection of independent auditors is subject to ratification by
shareholders of the Fund. The independent auditors are responsible for
auditing the financial statements of the Fund.
RATINGS OF SECURITIES
Description of Moodys Investors Service, Inc.s (
Moodys) Security Ratings
Aaa |
|
Securities which are rated
Aaa are judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as gilt edge.
Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure. While
the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the
fundamentally strong position of such issues. |
|
Aa |
|
Securities which are rated
Aa are judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade securities.
They are rated lower
than the best securities because margins of protection may not be as large
as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities. |
|
A |
|
Securities which are rated
A possess many favorable investment attributes and are to be considered
as upper medium grade obligations. Factors giving security to principal and
interest are considered
adequate, but elements may be present which suggest a susceptibility to
impairment sometime in
the future. |
|
Baa |
|
Securities which are rated
Baa are considered as medium grade obligation, i.e., they are
neither
highly protected nor poorly secured. Interest payments and principal
security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable
over any great length of time. Such securities lack outstanding investment
characteristics and in fact
have speculative characteristics as well. |
|
Ba |
|
Securities which are rated
Ba are judged to have speculative elements; their future cannot be
considered as well assured. Often the protection of interest and principal
payments may be very
moderate and thereby not well safeguarded during both good and bad times
over the future.
Uncertainty of position characterizes securities in this class. |
|
B |
|
Securities which are rated
B generally lack characteristics of the desirable investment. Assurance of
interest and principal payment or of maintenance of other terms of the
contract over any long
period of time may be small. |
|
Caa |
|
Securities which are rated
Caa are of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest. |
|
Ca |
|
Securities which are rated
Ca represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings. |
|
C |
|
Securities which are rated
C are the lowest rated class of securities and issues so rated can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. |
Note:
Those securities in the Aa, A, Baa, Ba and B groups which Moodys
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term
Notes: The three ratings of Moodys for short-term notes
are MIG 1/VMIG 1, MIG 2/VMIG 2 and MIG 3/VMIG 3; MIG 1/VMIG 1 denotes
best quality, strong protection from established cash flows; MIG
2/VMIG 2 denotes high quality with ample margins of protection;
MIG 3/VMIG 3 notes are of favorable quality but lacking the undeniable
strength of the preceding grades.
Description of Moodys Commercial Paper
Ratings
Moodys
Commercial Paper ratings are opinions of the ability of issuers to repay
punctually promissory obligations not having an original maturity in excess
of nine months. Moodys employs the following three designations, all
judged to be investment grade, to indicate the relative repayment capacity
of rated issuers:
Issuers rated Prime-1
(or supporting institutions) have a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment capacity will often be
evidenced by many of the following characteristics: leading market positions
in well established industries; high rates of return on funds employed;
conservative capitalization structures with moderate reliance on debt and
ample asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well established
access to a range of financial markets and assured sources of alternate
liquidity.
Issuers rated Prime-2
(or supporting institutions) have a strong ability for repayment of
short-term promissory obligations. This will normally be evidenced by many
of the characteristics cited above but to a lesser degree. Earnings trends
and coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is
maintained.
Issuers rated Prime-3
(or supporting institutions) have an acceptable ability for repayment of
short-term promissory obligations. The effects of industry characteristics
and market composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial leverage.
Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
Description of Standard & Poors, a Division of The
McGraw-Hill Companies, Inc. (Standard & Poors),
Corporate Debt Ratings
AAA |
|
Debt rated AAA has the
highest rating assigned by Standard & Poors. Capacity to pay
interest and
repay principal is extremely strong. |
|
AA |
|
Debt rated AA has a very
strong capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree. |
|
A |
|
Debt rated A has a strong
capacity to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in
higher rated categories. |
BBB |
|
Debt rated BBB is regarded
as having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay
principal for debt in this category than for debt in higher rated
categories. |
Debt rated BB, B,
CCC, CC and C is regarded, on balance, as having predominantly speculative
characteristics with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligation. BB indicates the lowest
degree of speculation and C the highest degree of speculation. While such
debt will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
BB |
|
Debt rated BB has less
near-term vulnerability to default than other speculative issues. However,
it
faces major ongoing uncertainties or exposure to adverse business, financial
or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or
implied BBB- rating. |
|
B |
|
Debt rated B has a greater
vulnerability to default but presently has the capacity to meet interest
payments and principal repayments. Adverse business, financial or economic
conditions would
likely impair capacity or willingness to pay interest and repay principal.
The B rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied BB or BB-
rating. |
|
CCC |
|
Debt rated CCC has a
current identifiable vulnerability to default, and is dependent upon
favorable
business, financial and economic conditions to meet timely payments of
interest and repayment of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt
subordinated to senior debt that is assigned an actual or implied B or B-
rating. |
|
CC |
|
The rating CC is typically
applied to debt subordinated to senior debt which is assigned an actual or
implied CCC rating. |
|
C |
|
The rating C is typically
applied to debt subordinated to senior debt which is assigned an actual or
implied CCC- debt rating. The C rating may be used to cover a situation
where a bankruptcy
petition has been filed but debt service payments are continued. |
|
CI |
|
The rating CI is reserved
for income bonds on which no interest is being paid. |
|
D |
|
Debt rated D is in payment
default. The D rating category is also used when interest payments or
principal repayments are not made on the date due even if the applicable
grace period has not
expired, unless Standard & Poors believes that such payments will
be made during such grace
period. The D rating also will be used upon the filing of a bankruptcy
petition if debt service
payments are jeopardized. |
Plus(+) or
Minus (-): The ratings from AA to CCC may be modified by the addition
of a plus or minus sign to show relative standing with the major rating
categories.
NR
indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that Standard &
Poors does not rate a particular type of obligation as a matter of
policy.
Description of Standard & Poors Commercial Paper
Ratings
A Standard & Poor
s commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging form A-1 for
the highest quality obligations to D for the lowest. These
categories are as follows:
A-1 |
|
This highest category
indicates that the degree of safety regarding timely payment is strong.
Those
issues determined to possess extremely strong safety characteristics are
denoted with a plus (+) sign
designation. |
|
A-2 |
|
Capacity for timely
payment on issues with this designation is satisfactory. However, the
relative
degree of safety is not as high as for issues designated A-1.
|
|
A-3 |
|
Issues carrying this
designation have a satisfactory capacity for timely payment. They are,
however,
somewhat more vulnerable to the adverse effects of changes in circumstances
than obligations
carrying the higher designations. |
|
B |
|
Issues rated B
are regarded as having only speculative capacity for timely
payment. |
|
C |
|
This rating is assigned to
short-term debt obligations with a doubtful capacity for
payment. |
|
D |
|
Debt rated D
is in payment default. The D rating category is used when
interest payments or
principal payments are not made on the date due, even if the applicable
grace period has not
expired, unless Standard & Poors believes that such payments will
be made during such grace
period. |
A commercial paper
rating is not a recommendation to purchase or sell a security. The ratings
are based on current information furnished to Standard & Poors by
the issuer or obtained from other sources it considers reliable. The ratings
may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
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POTENTIAL
INVESTORS
Open an account (two options).
|
___________________________|_______________________
| |
1 2
\|/ \|/
MERRILL LYNCH
FINANCIAL CONSULTANT TRANSFER AGENT
or SECURITIES DEALER --------------------------
---------------------------------------------- Financial Data Services, Inc.
Advises shareholders on their Fund investments. P.O. Box 45289
---------------------------------------------- Jacksonville, Florida 32232-5289
/|\ Performs recordkeeping and
reporting services.
| --------------------------
| /|\
| DISTRIBUTOR |
| ----------------------------------------------- |
| Merrill Lynch Funds Distributor, |
___\ a division of Princeton Funds Distributor, Inc. |
/ P.O. Box 9081 /__|
Princeton, New Jersey 08543-9081 \
Arranges for the sale of Fund shares.
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|
COUNSEL | CUSTODIAN
---------------------------------- \|/ ---------------------------
Brown & Wood LLP The Bank of New York
One World Trade Center _________\ THE FUND 90 Washington Street
New York, New York 10048-0557 / The Board of Directors /_______ 12th Floor
oversees the Fund. \ New York, New York 10286
Provides legal advice to the Fund. /|\ /|\
| | Holds the Fund's assets for
---------------------------------- | | safekeeping.
| | ---------------------------
| |
INDEPENDENT AUDITORS ____________| |______ INVESTMENT ADVISER
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Deloitte & Touche LLP Merrill Lynch Asset Management, L.P.
Princeton Forrestal Village
117 Campus Drive ADMINISTRATIVE OFFICES
Princeton, New Jersey 08540-6400 800 Scudders Mill Road
Plainsboro, New Jersey 08536
Audits the financial
statements of the Fund on behalf of MAILING ADDRESS
the shareholders. P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day
activities.
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MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
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