In the second quarter of 2025, the PGIM Floating Rate Income Fund Class Z delivered a net return of 2.52%, although it trailed its benchmark, the S&P UBS Leveraged Loan Index. This period generally saw positive total returns for U.S. leveraged loans, propelled by a resurgence in retail fund inflows and robust collateralized loan obligation (CLO) issuance. The market exhibited a discerning preference for B-rated loans, which demonstrated superior performance compared to both BB-rated and CCC-rated counterparts.
Amidst a backdrop of limited new loan originations, demand for leveraged loans remained strong. These new issuances primarily served various strategic objectives, including dividend distributions, mergers and acquisitions (M&A) financing, and leveraged buyouts (LBOs). Looking ahead, a critical determinant of superior investment performance in the leveraged loan sector over the next one to two years will be the effective avoidance of defaults.
For the second quarter of 2025, the PGIM Floating Rate Income Fund Class Z achieved a net return of 2.52%, which was below the gross return of its benchmark, the S&P UBS Leveraged Loan Index. This performance underscores a period where broader market trends favored leveraged loans, but specific fund-level outcomes diverged.
Across the leveraged loan landscape, the second quarter of 2025 was marked by overall positive total returns. This positive momentum was largely attributable to a notable increase in capital flowing into retail funds dedicated to leveraged loans, alongside a vigorous pace of CLO issuance. These factors combined to create a supportive environment for the asset class.
An analysis of loan quality revealed distinct performance differentials. Specifically, B-rated loans emerged as the strongest performers within the quarter. Their returns surpassed those of higher-rated BB-loans, indicating a willingness by investors to embrace a degree of credit risk for enhanced yield. Interestingly, B-rated loans also outpaced CCC-rated loans, highlighting a market preference for credits with a more balanced risk-reward profile rather than those at the riskiest end of the spectrum.
The market observed relatively light new issuance activity during the quarter. Despite this, investor demand remained robust. The capital raised through these new issuances was allocated to a variety of corporate finance activities. A significant portion facilitated dividend payments to shareholders, demonstrating companies' confidence in their financial health. Mergers and acquisitions also utilized new loan capital, reflecting ongoing consolidation and growth strategies. Furthermore, leveraged buyouts continued to be a source of demand for new loans, as private equity firms sought to acquire and restructure companies.
Looking to the future, the ability to mitigate and sidestep defaults is poised to be the most significant factor driving alpha, or excess returns, in the leveraged loan market over the subsequent 12 to 24 months. As economic conditions evolve and credit cycles progress, the capacity of borrowers to meet their obligations will directly impact investor returns, making credit selection and risk management paramount.
In summary, the second quarter of 2025 saw the PGIM Floating Rate Income Fund Class Z deliver a positive but benchmark-lagging return, amidst a generally favorable period for leveraged loans. Strong retail inflows and CLO activity fueled overall market gains, with B-rated loans leading performance across quality tiers. With light new issuance yet sustained demand, the market's future performance hinges significantly on the successful navigation of credit risk and the avoidance of defaults.