Senior Loan Select Closed-End, Series 45
As interest rates remain low, these are challenging times to invest for income. In this environment, many
investors are seeking alternative sources of income, including those which have historically reacted
favorably during periods of rising interest rates, such as senior loans.
Senior loans typically generate a higher level of income as short-term interest rates rise, providing
a potential offset to traditional fixed-rate bond holdings which typically come under pressure in
periods of rising rates. In addition, we believe senior loans currently offer a compelling value given
that the default rate in the senior loan market is well below its long-term average, the U.S. is
experiencing slow but positive economic growth, and there continues to be strong investor
demand for the asset class.
What Are Senior Loans?
Senior loans are floating-rate
secured debt extended to
corporations which are backed by
collateral, such as property, and are
senior in the capital structure of a
company. The capital structure is how a
company finances its overall operations
and growth by using different sources of
funds such as long-term debt, short-term debt, common equity and preferred equity.
Investors may find comfort in the fact that senior loans have a senior secured position in the
capital structure, thereby having a claim not only on the cash flow of a given company, but also its
assets. This added security has historically offered investors less volatility in relation to the junior
parts of a given capital structure.
Why Senior Loans?
- The interest paid on a senior loan resets every 30-90 days based on prevailing short-term
interest rates. Therefore, should short-term rates move higher, investors in senior loans would
receive a higher income stream due to the floating-rate nature of the interest on the loans.
Unlike securities with a fixed-rate coupon, a senior loan's floating-rate feature provides a natural
hedge against rising interest rates.
- We believe that senior loans can be used as an effective means to aid portfolio diversification
because of their low correlation to other fixed-income asset classes. Correlation is a statistical
measure that provides a way to evaluate the potential diversification benefits of combining
different assets. The historical correlation between senior loans and other asset classes, including
investment-grade corporate bonds and equities, is low. Because senior loans are not highly
correlated with other asset classes, they can potentially decrease portfolio volatility, enhance
overall return and provide meaningful diversification to an asset allocation strategy. It is
important to note that diversification does not guarantee a profit or protect against loss.
This unit investment trust seeks high current
income by investing in a diversified portfolio of
closed-end funds which invest in senior loan
floating-rate securities; however, there is no
assurance the objective will be met.
| Not FDIC Insured Not Bank Guaranteed May Lose Value
You should consider the portfolio's investment objectives, risks, and
charges and expenses carefully before investing. Contact your financial professional
or call First Trust Portfolios, L.P. at 1.800.621.1675 to request a prospectus,
which contains this and other information about the portfolio. Read it carefully
before you invest.
An investment in this unmanaged
unit investment trust should be made with an understanding of the
risks involved with owning closed-end funds that invest in senior loan
Closed-end funds are subject to various risks, including management’s
ability to meet the fund’s investment objective, and to manage the fund’s
portfolio when the underlying securities are redeemed or sold, during
periods of market turmoil and as investors’ perceptions regarding the
funds or their underlying investments change. Unlike open-end funds,
which trade at prices based on a current determination of the fund’s net
asset value, closed-end funds frequently trade at a discount to their net
asset value in the secondary market. All of the closed-end funds employ
the use of leverage, which increases the volatility of such funds.
All of the closed-end funds invest in floating-rate securities. A floating-rate security is an instrument in
which the interest rate payable on the obligation fluctuates on a periodic basis based upon changes in an
interest rate benchmark. As a result, the yield on such a security will generally decline in a falling interest rate
environment, causing the trust to experience a reduction in the income it receives from such securities. All of
the floating-rate securities pay interest based on LIBOR. The United Kingdom’s Financial Conduct Authority,
which regulates LIBOR, will cease making LIBOR available as a reference rate over a phase-out period that
will begin immediately after December 31, 2021. The unavailability or replacement of LIBOR may affect the
value, liquidity or return on certain portfolio investments. Any potential effects of the transition away from
LIBOR can be difficult to ascertain, and they may vary depending on a variety of factors and they could result
in losses to the portfolio.
The yield on closed-end funds which invest in senior loans will generally
decline in a falling interest rate environment and increase in a rising
interest rate environment. Senior loans are generally below investment
grade quality (“high-yield” securities or “junk” bonds). Investing in
such securities should be viewed as speculative and you should review
your ability to assume the risks associated with investments which
utilize such securities. High-yield securities are subject to numerous
risks including higher interest rates, economic recession, deterioration
of the high-yield securities market, possible downgrades and defaults
of interest and/or principal. High-yield security prices tend to fluctuate
more than higher rated securities and are affected by short-term credit
developments to a greater degree.
All of the closed-end funds invest in covenant-lite loans which contain fewer or no maintenance covenants
and may hinder a closed-end fund’s ability to reprice credit risk and mitigate potential loss especially during
a downturn in the credit cycle.
All of the closed-end funds invest in securities issued by foreign issuers.
Such securities are subject to certain risks including currency and
interest rate fluctuations, nationalization or other adverse political or
economic developments, lack of liquidity of certain foreign markets,
withholding, the lack of adequate financial information, and exchange
control restrictions impacting foreign issuers.
About one year after the United Kingdom officially departed the European Union (commonly referred to as “Brexit”), the United Kingdom and the European Union reached a trade agreement that became effective on
December 31, 2020. It is not currently possible to determine the extent of the impact the Brexit trade agreement may have on the portfolio’s investments and this certainly could negatively impact current and future economic
conditions in the United Kingdom and other countries, which could negatively impact the value of the portfolio’s investments.
As the use of Internet technology has become more prevalent in
the course of business, the trust has become more susceptible to
potential operational risks through breaches in cybersecurity.
The COVID-19 global pandemic has caused significant volatility and declines in global financial markets,
causing losses for investors. The development of vaccines has slowed the spread of the virus and allowed
for the resumption of “reasonably” normal business activity in the United States, although many countries
continue to impose lockdown measures. Additionally, there is no guarantee that vaccines will be effective
against emerging variants of the disease.
It is important to note that an investment can be made in the
underlying funds directly rather than through the trust. These
direct investments can be made without paying the trust’s sales
charge, operating expenses and organizational costs.
The value of the securities held by the trust may be subject to
steep declines or increased volatility due to changes in
performance or perception of the issuers.
This UIT is a buy and hold strategy and investors should consider
their ability to hold the trust until maturity. There may be tax
consequences unless units are purchased in an IRA or other
For a discussion of additional risks of investing in the trust see
the "Risk Factors" section of the prospectus.