Senior Floating-Rate Trust

A Word On The Markets  as of Mar 31, 2013

The U.S. floating-rate loan market performed solidly during the first quarter, reflecting positive investor sentiment across the capital markets. Following a strong performance in 2012—during which loans earned a 9.66% return—momentum continued in the asset class, with the S&P/LSTA Leveraged Loan Index (the Index)⁵ —a broad barometer for the loan market—advancing 2.11% for the three-month period ended March 31, 2013. Returns were comprised of nearly equal parts price appreciation and investment income, with loan values firming on healthy fundamental and technical conditions in the market. Loans finished the quarter on strong footing, with the Index returning 0.82% in March.

With fundamentals broadly in check and the default rate low, returns during the quarter were primarily driven by technical conditions, which remained favorable. Inflows into the asset class remained robust, with collateralized loan obligation (CLO) issuance and retail fund subscriptions outstripping the net supply of new loans issued, which expanded during the quarter though more modestly. With investors’ search for yield and growing appetite for risk, loans remained in focus due to their near-par valuations, zero-like duration and floating income stream. Still, with loans priced near par, strong demand continued to drive spread compression in the market throughout the quarter, lowering coupon income in a way not dissimilar to the reduced yields found in many other income market segments.

Performance Summary 

Eaton Vance Senior Floating-Rate Trust (EFR) outperformed the Index at net asset value for the three-month period ending March 31, 2013. The predominant factors driving relative performance during the quarter were quality positioning, beneficial credit selection, high-yield bond exposure and investment leverage.

• Against a backdrop that continued to favor lower-quality loans, the Trust outperformed the Index despite its up-in-quality biased portfolio. For the three months through March 31st, BB-rated loans⁶ in the Index returned 1.39%, B-rated loans in the Index returned 2.42% and CCC-rated loans in the Index returned 5.21%. Across these ratings tiers, the Trust had overweight exposure to BB-rated loans and underweight exposure to B-rated and CCC-rated loans.
• While the Trust's quality positioning generally served as a headwind, off-benchmark exposure to high-yield bonds—which outperformed the loan market—employment of investment leverage and beneficial credit selection across the board provided enough contribution to drive positive relative results overall for the quarter. The Index does not include high-yield bonds and is unlevered.

Investment Outlook And Fund Positioning 

Looking ahead, performance should be characterized predominantly by the income component of returns. The vast majority of the loan market traded at, and even above, par values as the second quarter began to unfold. The average price for the overall market ended March at $98.17, although this metric is driven below par predominantly by CCC-rated loans, which had an average price of $83.5 at the end of March and comprise approximately 10% of the market. By comparison, BB-rated loans and B-rated loans ended the quarter at average prices of $100.8 and $100.2, respectively. As a result of these levels, “clip-the-coupon”-type total return expectations seem appropriate as a baseline.

We believe the environment for loans should remain benign in the near term, thanks to low credit risk and a positive technical bias. The default rate in the market ended March at 2.21% by principal amount. Looking at technicals, demand continues from all quarters, including funds, CLOs and institutional accounts. Should the positive technical condition in the market persist, lower coupon income for the loan investor may be in the offing. Still, given the low-yield environment, heightened bond risk and the dearth of fairly valued, low duration income alternatives, we believe loans should retain their relative attractiveness ahead.

The views expressed in this report are those of portfolio manager(s) and are current only through the date stated at the top of this page. These views are subject to change at any time based upon market or other conditions, and Eaton Vance disclaims any responsibility to update such views. These views may not be relied upon as investment advice and, because investment decisions are based on many factors, may not be relied upon as an indication of trading intent on behalf of any Eaton Vance fund. This commentary may contain statements that are not historical facts, referred to as "forward looking statements". The Fund's actual future results may differ significantly from those stated in any forward-looking statement, depending on factors such as changes in securities or financial markets or general economic conditions, the volume of sales and purchases of Fund shares, the continuation of investment advisory, administrative and service contracts, and other risks discussed from time to time in the Fund's filings with the Securities and Exchange Commission.

The information contained herein is provided for informational purposes only and does not constitute a solicitation of an offer to buy or sell Fund shares. Common shares of the Fund are only available for purchase and sale at current market price on a stock exchange. There is no assurance that the Fund will achieve its investment objective. The Fund is subject to investment risks, including possible loss of principal invested. The Fund is not a complete investment program and you may lose money investing in the Fund. An investment in the Fund may not be appropriate for all investors.

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