| UNITED STATES |
| SECURITIES AND EXCHANGE COMMISSION |
| Washington, D.C. 20549 |
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FORM N-CSR |
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CERTIFIED SHAREHOLDER REPORT OF REGISTERED |
MANAGEMENT INVESTMENT COMPANIES |
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| Investment Company Act File Number: 811-21055 |
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| T. Rowe Price Institutional Income Funds, Inc. |
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| (Exact name of registrant as specified in charter) |
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| 100 East Pratt Street, Baltimore, MD 21202 |
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| (Address of principal executive offices) |
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| David Oestreicher |
| 100 East Pratt Street, Baltimore, MD 21202 |
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| (Name and address of agent for service) |
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| Registrant’s telephone number, including area code: (410) 345-2000 |
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| Date of fiscal year end: May 31 |
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| Date of reporting period: May 31, 2011 |
Item 1: Report to Shareholders| Institutional Floating Rate Fund | May 31, 2011 |
• The loan market generated strong gains for the year ended May 31, 2011.
• The Institutional Floating Rate Fund outperformed the S&P/LSTA Performing Loan Index for the fiscal year.
• Investor demand for bank debt remained substantial in the low interest rate environment, and investors were rewarded for their steadfast conviction.
• The bank loan asset class offers a compelling blend of above-average yield potential combined with a low duration profile.
The views and opinions in this report were current as of May 31, 2011. They are not guarantees of performance or investment results and should not be taken as investment advice. Investment decisions reflect a variety of factors, and the managers reserve the right to change their views about individual stocks, sectors, and the markets at any time. As a result, the views expressed should not be relied upon as a forecast of the fund’s future investment intent. The report is certified under the Sarbanes-Oxley Act, which requires mutual funds and other public companies to affirm that, to the best of their knowledge, the information in their financial reports is fairly and accurately stated in all material respects.
Manager’s Letter
T. Rowe Price Institutional Floating Rate Fund
Dear Investor
Leveraged loans generated solid gains in the fiscal year ended May 31, 2011. Companies in the bank loan market continued to perform well and remain fundamentally strong. The overall environment for below investment-grade companies appears favorable due to moderating default expectations, abundant liquidity, and improving corporate balance sheets. Over the period, many companies were able to extend their maturities and pay down debt from an absolute perspective. Loan prices moved higher and yields trended lower, although the market experienced a soft patch in May as the economic signals weakened and concerns about the European sovereign debt crisis worsened. Based on these events, and coupled with a record new issue calendar that can create digestion issues, we would not be surprised to see a short-term pullback.
Portfolio Performance
The portfolio returned 4.09% for the six-month period and 10.45% for the 12 months ended May 31, 2011. As shown in the Performance Comparison table, your fund outperformed the S&P/LSTA Performing Loan Index for the year but trailed in the final six months of the reporting period. Returns for F Class shares varied slightly since their inception on August 27, 2010, due to their different expense structure. Your fund’s primary focus remains on the higher-quality tiers within the below investment-grade universe and companies with sufficient asset protection to ensure a full recovery of principal in the event of default.
In the past six months, the lowest-quality credits in the benchmark outperformed, and the portfolio’s credit selection within that segment weighed on relative performance. We typically avoid smaller, less-liquid loans, and this riskier segment outperformed. Your portfolio continues to maintain high allocations to traditional loan structures with solid covenants and first priority on assets. The portfolio remained underweight relative to the S&P/LSTA Performing Loan Index in speculative loans originated in 2006 and 2007, where covenants and restrictions were more relaxed and leverage was higher.
Most purchase activity during the reporting period was through the active primary market, enabling us to systematically upgrade the portfolio’s overall credit quality. As a result of this activity, the portfolio’s weighted average maturity extended to 5.6 years from 4.7 years six months ago. The fund’s duration, a measure of sensitivity to interest rates changes, also slightly increased to 0.7 years. Our purchases of secured fixed rate bonds, which now total 14% of the portfolio, largely account for this move. These securities have a current income stream that is more than 400 basis points (4.00%) higher than their loan counterparts without altering the underlying credit risk.
We focus on asset-rich companies in less-cyclical sectors, such as health care, wireless, and financials. Evaluating a company’s asset coverage and calculating the recovery rate over different scenarios to understand our downside protection is essential to our credit research process. Over the last 12 months, roughly 60% of the fund’s return was generated by income, with the remainder from capital appreciation. We believe the capital appreciation phase in the market is now largely behind us, and, in the coming year, we expect this component of total return to be more muted, leaving income to provide the majority of portfolio results.
Market Environment
In the past six months and year, the loan market benefited from steady cash inflows, positive sentiment, and a decline in default expectations. Investors gravitated to the asset class to capture higher yields compared with alternative short-duration instruments. New leveraged loan issuance was at the forefront this year; the volume stood at $154 billion for the year to date through May, nearly surpassing all of 2010—63 loans came to market in May, totaling a record $38 billion for the month. Many new issues offer attractive loan structures with Libor floors (minimum interest payments based on the interbank lending benchmark) as well as soft call protection (a limited premium that an issuer must pay to call a bond). Refinancing activity accounted for the majority of volume in the early months of the year. Prolonged periods of refinancing existing debt can lead to improving corporate credit metrics and fewer defaults.
Loan fundamentals have also improved. Default rates have trended steadily lower from a peak of 11% in 2009. The investment environment for the loan market has remained quite healthy, leverage has decreased, and liquidity has improved on corporate balance sheets. As a result of this favorable environment, upgrades have outnumbered downgrades. Default rate expectations remain low, in the 1% to 2% range for 2011 and below 2% through 2013.
As a result of these factors, leveraged loans generated solid returns, but the loan market encountered modest weakness as the reporting period came to a close. Fears that the global economy was slowing led many economists to lower their growth forecasts for the second quarter and the year, causing investors to become increasingly risk averse. Higher-risk assets, including high yield bonds, bank loans, and equities, hit a soft patch due, in part, to high oil prices, uncertainty about Greece and peripheral Europe, the impact of Japanese supply chain disruptions, and weaker-than-expected economic readings. Nevertheless, corporate fundamentals in the loan market remained strong.
Investment Themes
We continue to actively pursue several trends in our market. The first, which is referred to as “amend to extend,” occurs when a company has a significant tranche of debt maturing. The issuer will seek an amendment from creditors that allows an extension to the maturity date on part, or all, of the outstanding loan. Investors typically receive a higher coupon (1.5 additional percentage points is relatively common) plus an amendment fee in exchange for this extension. The pace of this activity has slowed from 2010, as many companies needing to extend their maturities have already done so.
Another method corporations use to reduce maturing bank debt is by issuing senior secured bonds to take out existing loans. Several of our loan holdings were retired at par via this route, and the portfolio’s allocation to fixed rate senior secured bonds has increased. As discussed previously, we view this as an attractive opportunity as bonds pay higher interest income for a similar level of risk.
Finally, new issue activity was robust, a trend that should continue for the foreseeable future to address loans coming due in the next several years. This is evident in the fact that the majority of issuance has been refinancing related. Even among the leveraged buyout (LBO) deals coming to market, most offer better loan structures, and many have soft call protection and Libor floors. Similarly, the leverage through the loan level is reasonable, and equity sponsors are providing a large amount of the funding.
Portfolio Review
At the end of the reporting period, the portfolio was 93% invested in securities rated split B or higher. Because of market activity, our CCC rated securities slightly decreased over the 12-month period, and, as a result, the portfolio’s overall credit quality was marginally upgraded.
In an effort to generate more current income, we purchased select fixed rate senior secured bonds. Many of these are backed by specific assets, similar to bank loans, but they generate higher yields. Additionally, we evaluated unsecured floating rate notes, which are lower in the capital structure. Based on our research capabilities, we would rather invest further down the capital structure in a solid credit than higher up the structure in a CCC rated loan. The portfolio remains overweight in higher-quality credits. At the end of the reporting period, the portfolio was about 300 basis points overweight in B and above rated credits, and we were similarly underweight in the CCC and not rated categories. However, in the past six months, these lower-rated segments outperformed, and our positioning detracted from relative results. Although we are in a low default rate environment, we will only purchase holdings that meet our standards and when we are confident about a company’s underlying fundamentals.
We remain focused on asset-rich companies in less-cyclical sectors. As shown in the table on page 7, health care, services, and financials are the portfolio’s top three industry exposures. We reduced the fund’s absolute weight in financials by more than two percentage points over the past six months. While we still view the sector favorably and are overweight versus the benchmark by over 100 basis points, the sales generated substantial profits. Over the past year, the sector’s valuations approached our target levels. At the end of 2009, financials became one of the largest sectors in the below investment-grade market, with fallen angels, or companies downgraded from investment grade, accounting for much of this increase. We added to our exposure predicated on the belief that many of these companies would return to investment-grade status to reduce their capital costs.
Over the past six months, our largest industry additions were in retail and technology. We participated in several LBO retail and technology new issue offerings. Software-based technology companies have generated a lot of interest, and we typically are comfortable investing in this segment because it tends to be less cyclical than other manufacturers in the technology space.
In the last six months, eight of the fund’s top 10 contributors were LBO-related companies that have benefited from balance sheet repair. First Data, for example, was a top contributor in the last six months. Earlier this year, the company executed a bond and loan exchange, terming out, or extending the maturity on, roughly $6 billion of senior unsecured high yield bonds and extending the maturity on approximately half of its loans. Energy Future Holdings (formerly known as TXU), another top contributor, executed an even larger loan extension—the company termed out about 80% of its 2014 loans to 2017. Not only are First Data and Energy Future Holdings among the largest issuers in the loan market, but each company has largely addressed its maturity wall of debt due in 2013 and 2014. (Please refer to the fund’s portfolio of investments for a complete list of holdings and the amount each represents in the portfolio.)
Intelsat Telecom Satellite, KAR Holdings, and Asurion were also among the largest loan purchases and best contributors in the six-month period. Each offering was attractively priced, and we have solid conviction in their businesses. Intelsat is a satellite company that generates stable revenues and cash flows through long-term contracts and is now the portfolio’s largest individual holding. The company has a reasonably leveraged capital structure, and pricing on the loan was compelling. Although, through the combination of positions in loans and bonds, First Data and Univision Communications are larger issuers in the portfolio. Other significant contributors among our largest holdings include CDW and Clear Channel Communications. Both companies issued secured debt to manage their impending loan maturities.
Other Contributors and Detractors
Ally Financial is another large position that generated strong gains in the last six months. The company has not issued bank loans and is therefore an out-of-benchmark holding. A bailout engineered when the company was on the brink of bankruptcy made the federal government a majority shareholder in December 2008. The former finance arm of General Motors has now become a money center lending bank. Leveraging our expertise of the company’s full capital structure, we purchased floating rate senior unsecured bonds. Although the bonds are further down the capital structure than loans, we felt confident in the position because of our credit analysis and because the federal government was the equity sponsor. Floating rate notes represented 6% of the fund at the end of May, and Ally, which is among our 25 largest issuers, represented roughly 1% of the portfolio. The Ally purchase spotlights our ability to evaluate each investment option while identifying securities that work within our mandate.
Retailers were weak in the past six months, and several of our holdings in the segment were among our largest detractors. We found attractive new issues from Gymboree and J. Crew, both historically stable retailers and clothes manufacturers. We also added Claire’s, which sells low-priced accessories for teenagers, a business that tends to be more stable than the traditional fashion-centric retailers. We believe these names sold off in conjunction with weak consumer numbers, a gross domestic product figure revised down from expectations, and jobs data that remain soft. However, these companies continue to generate steady topline growth, and underlying fundamentals in these investments appear solid. Recent increases in cotton prices have affected these and other companies that manufacture clothes with high cotton content, resulting in profit margin pressures.
Our largest industry shift in the past six months was the reduction in our automotives exposure to 3% from 7%. Automotives face weakness in the coming months based on supply chain issues following the earthquake in Japan. We significantly trimmed our position in Ford as the company reached our target valuation levels, and we found better investment opportunities elsewhere.
Focus on Income
As we noted, it is likely that current coupons will compose a larger portion of the fund’s performance going forward. Protecting the portfolio’s current income stream is a critical objective as most opportunities for capital appreciation are behind us. Several of the sector shifts that we made in the past six months addressed our renewed focus on maintaining a solid current income stream. We now have more than 50% of the portfolio invested in loans with a Libor floor, a significant increase from 30% six months ago. Most new loans issued during the period came with floors, and every loan purchased in the last six months had a Libor floor.
We also increased our fixed rate bond exposure by approximately 200 basis points during the last six months. We now hold 14% of the fund in fixed rate senior secured issues, which are near the top of the capital structure and are pari passu with bank debt. On average, the bonds have a current yield of 8.5%, much higher than the 4.75% to 5.25% average yield on our loans. We made a conscious effort to increase the portfolio’s yield as market interest rates declined. However, this positioning resulted in a slight increase to our duration posture, as a pure bank loan portfolio would have a 0.25-year duration and we now stand at 0.7 years. We believe the trade-off, more current income with a modestly greater sensitivity to interest rate fluctuations, is worthwhile. Right now, we are at the high end of our duration range, and it is unlikely that the fund would reach a one-year duration.
Outlook
We remain positive on the intermediate- and longer-term prospects for our companies, corporate fundamentals remain solid, valuations appear reasonable, and we think that defaults will remain below 2% through 2012. However, sovereign debt concerns and severe fiscal austerity measures in peripheral European countries could reduce global growth expectations and weigh on market sentiment in the near term. In this context, investors’ recent flight from riskier assets is understandable, especially given the strong rally in higher-risk assets that began more than two years ago. We think rates will start to rise when signs of inflation begin to appear.
The portfolio is focused on principal preservation and generating a stable above-average income stream. As interest rates and credit spreads have compressed, protecting the income stream has been a challenge. We will likely generate our coupon for the rest of the year, but we do not expect significant capital appreciation. Bank loan funds historically outperformed most alternative fixed income investments in a rising rate environment. Our Libor floors are at least 125 basis points, so there might be a lag before the full impact of the floating rate feature is realized.
Despite the short-term risks, largely based on macroeconomic events, more positives than negatives exist within our market. For example, defaults are low, there is ample liquidity, and companies are able to borrow at reasonable rates. Fundamentally, revenues and earnings are improving for many of our companies. Nevertheless, we recommend that investors contain their expectations for this market over the coming year. Returns will likely be lower than the exceptional gains we have enjoyed over the past two and a half years.
As always, our goal is to deliver high current income and attractive total returns over time while seeking to protect against the volatility inherent in this market. We will continue our commitment to research and diversification which we believe is prudent for a fund that invests in a riskier area of the bond market. We view floating rate loans as an excellent asset class for diversification as well as an indirect hedge against inflation in a rising interest rate environment.
Respectfully submitted,
Justin T. Gerbereux
Cochairman of the fund’s Investment Advisory Committee
Paul M. Massaro
Cochairman of the fund’s Investment Advisory Committee
June 17, 2011
The committee chairmen have day-to-day responsibility for managing the portfolio and work with committee members in developing and executing the fund’s investment program.
| Risks of Investing in Floating Rate Loan Funds |
Floating rate loans are subject to credit risk, the chance that any fund holding could have its credit rating downgraded or that a issuer will default (fail to make timely payments of interest or principal), and liquidity risk, the chance that the fund may not be able to sell loans or securities at desired prices, potentially reducing the fund’s income level and share price. Like bond funds, this fund is exposed to interest rate risk, but credit and liquidity risks may often be more important.
The loans in which the fund invests are often referred to as leveraged loans because the borrowing companies have significantly more debt than equity. In many cases, leveraged loans are issued in connection with recapitalizations, acquisitions, LBOs, and refinancings. Companies issuing leveraged loans typically have a below investment-grade credit rating or may not be rated by a major credit rating agency. Leveraged loan funds could have greater price declines than funds that invest primarily in high-quality bonds, so the securities are usually considered speculative investments.
Basis point: One one-hundredth of a percentage point, or 0.01%.
London Interbank Offered Rate (Libor): The interest rate at which banks loan money to each other in London wholesale market, which is also known as the interbank market.
SEC yield (30-day): A method of calculating a fund’s yield that assumes all portfolio securities are held until maturity. Yield will vary and is not guaranteed.
S&P/LSTA Performing Loan Index: A benchmark that tracks the performance of the leveraged loan market.
Weighted average maturity: A measure of a fund’s interest rate sensitivity. In general, the longer the average maturity, the greater the fund’s sensitivity to interest rate changes. The weighted average maturity may take into account the interest rate readjustment dates for certain securities.
Weighted average modified duration: A measure of a bond’s or bond fund’s sensitivity to changes in interest rates. For example, a fund with a one-year duration would fall about 1% in response to a one-percentage-point rise in interest rates, and vice versa.
Portfolio Highlights
Performance and Expenses
T. Rowe Price Institutional Floating Rate Fund
This chart shows the value of a hypothetical $1 million investment in the fund over the past 10 fiscal year periods or since inception (for funds lacking 10-year records). The result is compared with benchmarks, which may include a broad-based market index and a peer group average or index. Market indexes do not include expenses, which are deducted from fund returns as well as mutual fund averages and indexes.
Fund Expense Example
As a mutual fund shareholder, you may incur two types of costs: (1) transaction costs, such as redemption fees or sales loads, and (2) ongoing costs, including management fees, distribution and service (12b-1) fees, and other fund expenses. The following example is intended to help you understand your ongoing costs (in dollars) of investing in the fund and to compare these costs with the ongoing costs of investing in other mutual funds. The example is based on an investment of $1,000 invested at the beginning of the most recent six-month period and held for the entire period.
Actual Expenses
The first line of the following table (“Actual”) provides information about actual account values and actual expenses. You may use the information in this line, together with your account balance, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line under the heading “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.
Hypothetical Example for Comparison Purposes
The information on the second line of the table (“Hypothetical”) is based on hypothetical account values and expenses derived from the fund’s actual expense ratio and an assumed 5% per year rate of return before expenses (not the fund’s actual return). You may compare the ongoing costs of investing in the fund with other funds by contrasting this 5% hypothetical example and the 5% hypothetical examples that appear in the shareholder reports of the other funds. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period.
You should also be aware that the expenses shown in the table highlight only your ongoing costs and do not reflect any transaction costs, such as redemption fees or sales loads. Therefore, the second line of the table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. To the extent a fund charges transaction costs, however, the total cost of owning that fund is higher.
Financial Highlights
T. Rowe Price Institutional Floating Rate Fund
The accompanying notes are an integral part of these financial statements.
Financial Highlights
T. Rowe Price Institutional Floating Rate Fund
The accompanying notes are an integral part of these financial statements.
Portfolio of Investments‡
T. Rowe Price Institutional Floating Rate Fund
May 31, 2011
The accompanying notes are an integral part of these financial statements.
Statement of Assets and Liabilities
T. Rowe Price Institutional Floating Rate Fund
May 31, 2011
($000s, except shares and per share amounts)
The accompanying notes are an integral part of these financial statements.
Statement of Operations
T. Rowe Price Institutional Floating Rate Fund
($000s)
The accompanying notes are an integral part of these financial statements.
Statement of Changes in Net Assets
T. Rowe Price Institutional Floating Rate Fund
($000s)
The accompanying notes are an integral part of these financial statements.
Notes to Financial Statements
T. Rowe Price Institutional Floating Rate Fund
May 31, 2011
T. Rowe Price Institutional Income Funds, Inc. (the corporation), is registered under the Investment Company Act of 1940 (the 1940 Act). The Institutional Floating Rate Fund (the fund), a diversified, open-end management investment company, is one portfolio established by the corporation. The fund seeks high current income and, secondarily, capital appreciation. The fund has two classes of shares: the Institutional Floating Rate Fund original share class, referred to in this report as the Institutional Class, offered since January 31, 2008, and the Institutional Floating Rate Fund – F Class (F Class), offered since August 27, 2010. F Class shares are available only through financial advisors and certain third-party intermediaries that have entered into an administrative fee agreement with T. Rowe Price Services, Inc. The F Class participates in a Board-approved administrative fee payment program pursuant to which the fund compensates certain financial intermediaries at a rate of up to 0.10% of average daily net assets (up to 0.15% of average daily net assets for certain defined contribution plans) per year for various shareholder and administrative services they provide to underlying investors. Each class has exclusive voting rights on matters related solely to that class; separate voting rights on matters that relate to both classes; and, in all other respects, the same rights and obligations as the other class.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Preparation The accompanying financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), which require the use of estimates made by management. Management believes that estimates and valuations are appropriate; however, actual results may differ from those estimates, and the valuations reflected in the accompanying financial statements may differ from the value ultimately realized upon sale or maturity.
Investment Transactions, Investment Income, and Distributions Income and expenses are recorded on the accrual basis. Premiums and discounts on debt securities are amortized for financial reporting purposes. Paydown gains and losses are recorded as an adjustment to interest income. Dividends received from mutual fund investments are reflected as dividend income; capital gain distributions are reflected as realized gain/loss. Dividend income and capital gain distributions are recorded on the ex-dividend date. Income tax-related interest and penalties, if incurred, would be recorded as income tax expense. Investment transactions are accounted for on the trade date. Realized gains and losses are reported on the identified cost basis. Distributions to shareholders are recorded on the ex-dividend date. Income distributions are declared by each class daily and paid monthly. Capital gain distributions, if any, are generally declared and paid by the fund annually.
Currency Translation Assets, including investments, and liabilities denominated in foreign currencies are translated into U.S. dollar values each day at the prevailing exchange rate, using the mean of the bid and asked prices of such currencies against U.S. dollars as quoted by a major bank. Purchases and sales of securities, income, and expenses are translated into U.S. dollars at the prevailing exchange rate on the date of the transaction. The effect of changes in foreign currency exchange rates on realized and unrealized security gains and losses is reflected as a component of security gains and losses.
Class Accounting The F Class pays certain shareholder and administrative expenses in an amount not exceeding 0.15% of the class’s average daily net assets; no such fees were incurred by the F Class during the period ended May 31, 2011. Investment income and investment management and administrative expense are allocated to the classes based upon the relative daily net assets of each class’s settled shares; realized and unrealized gains and losses are allocated based upon the relative daily net assets of each class’s outstanding shares.
Redemption Fees A 1% fee is assessed on redemptions of fund shares held for 90 days or less to deter short-term trading and to protect the interests of long-term shareholders. Redemption fees are withheld from proceeds that shareholders receive from the sale or exchange of fund shares. The fees are paid to the fund and are recorded as an increase to paid-in capital. The fees may cause the redemption price per share to differ from the net asset value per share.
New Accounting Pronouncement On June 1, 2010, the fund adopted new accounting guidance that requires enhanced disclosures about fair value measurements in the financial statements. Adoption of this guidance had no impact on the fund’s net assets or results of operations.
NOTE 2 - VALUATION
The fund’s financial instruments are reported at fair value as defined by GAAP. The fund determines the values of its assets and liabilities and computes each class’s net asset value per share at the close of the New York Stock Exchange (NYSE), normally 4 p.m. ET, each day that the NYSE is open for business.
Valuation Methods Debt securities are generally traded in the over-the-counter (OTC) market. Securities with remaining maturities of one year or more at the time of acquisition are valued at prices furnished by dealers who make markets in such securities or by an independent pricing service, which considers the yield or price of bonds of comparable quality, coupon, maturity, and type, as well as prices quoted by dealers who make markets in such securities. Securities with remaining maturities of less than one year at the time of acquisition generally use amortized cost in local currency to approximate fair value. However, if amortized cost is deemed not to reflect fair value or the fund holds a significant amount of such securities with remaining maturities of more than 60 days, the securities are valued at prices furnished by dealers who make markets in such securities or by an independent pricing service.
Investments in mutual funds are valued at the mutual fund’s closing net asset value per share on the day of valuation. Forward currency exchange contracts are valued using the prevailing forward exchange rate. Swaps are valued at prices furnished by independent swap dealers or by an independent pricing service.
Other investments, including restricted securities, and those financial instruments for which the above valuation procedures are inappropriate or are deemed not to reflect fair value are stated at fair value as determined in good faith by the T. Rowe Price Valuation Committee, established by the fund’s Board of Directors.
Valuation Inputs Various inputs are used to determine the value of the fund’s financial instruments. These inputs are summarized in the three broad levels listed below:
Level 1 – quoted prices in active markets for identical financial instruments
Level 2 – observable inputs other than Level 1 quoted prices (including, but not limited to, quoted prices for similar financial instruments, interest rates, prepayment speeds, and credit risk)
Level 3 – unobservable inputs
Observable inputs are those based on market data obtained from sources independent of the fund, and unobservable inputs reflect the fund’s own assumptions based on the best information available. The input levels are not necessarily an indication of the risk or liquidity associated with financial instruments at that level. The following table summarizes the fund’s financial instruments, based on the inputs used to determine their values on May 31, 2011:
NOTE 3 - DERIVATIVE INSTRUMENTS
During the year ended May 31, 2011, the fund invested in derivative instruments. As defined by GAAP, a derivative is a financial instrument whose value is derived from an underlying security price, foreign exchange rate, interest rate, index of prices or rates, or other variable; it requires little or no initial investment and permits or requires net settlement. The fund invests in derivatives only if the expected risks and rewards are consistent with its investment objectives, policies, and overall risk profile, as described in its prospectus and Statement of Additional Information. The fund may use derivatives for a variety of purposes, such as seeking to hedge against declines in principal value, increase yield, invest in an asset with greater efficiency and at a lower cost than is possible through direct investment, or to adjust portfolio duration and credit exposure. The risks associated with the use of derivatives are different from, and potentially much greater than, the risks associated with investing directly in the instruments on which the derivatives are based. Investments in derivatives can magnify returns positively or negatively; however, the fund at all times maintains sufficient cash reserves, liquid assets, or other SEC-permitted asset types to cover the settlement obligations under its open derivative contracts.
The fund values its derivatives at fair value, as described below and in Note 2, and recognizes changes in fair value currently in its results of operations. Accordingly, the fund does not follow hedge accounting, even for derivatives employed as economic hedges. The fund does not offset the fair value of derivative instruments against the right to reclaim or obligation to return collateral.
The following table summarizes the fair value of the fund’s derivative instruments held as of May 31, 2011, and the related location on the accompanying Statement of Assets and Liabilities, presented by primary underlying risk exposure:
Additionally, the amount of gains and losses on derivative instruments recognized in fund earnings during the year ended May 31, 2011, and the related location on the accompanying Statement of Operations is summarized in the following table by primary underlying risk exposure:
Forward Currency Exchange Contracts The fund is subject to foreign currency exchange rate risk in the normal course of pursuing its investment objectives. It uses forward currency exchange contracts (forwards) primarily to protect its non-U.S. dollar-denominated securities from adverse currency movements relative to the U.S. dollar. A forward involves an obligation to purchase or sell a fixed amount of a specific currency on a future date at a price set at the time of the contract. Although certain forwards may be settled by exchanging only the net gain or loss on the contract, most forwards are settled with the exchange of the underlying currencies in accordance with the specified terms. Forwards are valued at the unrealized gain or loss on the contract, which reflects the net amount the fund either is entitled to receive or obligated to deliver, as measured by the difference between the forward exchange rates at the date of entry into the contract and the forward rates at the reporting date. Appreciated forwards are reflected as assets, and depreciated forwards are reflected as liabilities on the accompanying Statement of Assets and Liabilities. Risks related to the use of forwards include the possible failure of counterparties to meet the terms of the agreements; that anticipated currency movements will not occur, thereby reducing the fund’s total return; and the potential for losses in excess of the fund’s initial investment. During the year ended May 31, 2011, the fund’s exposure to forwards, based on underlying notional amounts, was generally between 1% and 3% of net assets.
Credit Default Swaps The fund is subject to credit risk in the normal course of pursuing its investment objectives and uses swap contracts to help manage such risk. The fund may use swaps in an effort to manage exposure to changes in interest rates and credit quality, to adjust overall exposure to certain markets, to enhance total return or protect the value of portfolio securities, to serve as a cash management tool, and/or to adjust portfolio duration or credit exposure. Credit default swaps are agreements where one party (the protection buyer) agrees to make periodic payments to another party (the protection seller) in exchange for protection against specified credit events, such as certain defaults and bankruptcies related to an underlying credit instrument, index, or issuer thereof. Upon occurrence of a specified credit event, the protection seller is required to pay the buyer the difference between the notional amount of the swap and the value of the underlying credit, either in the form of a net cash settlement or by paying the gross notional amount and accepting delivery of the relevant underlying credit. Generally, the payment risk for the seller of protection is inversely related to the current market price of the underlying credit; therefore, the payment risk increases as the price of the relevant underlying credit declines due to market valuations of credit quality. As of May 31, 2011, the notional amount of protection sold by the fund totaled $12,875,000 (0.7% of net assets), which reflects the maximum potential amount the fund could be required to pay under such contracts. The value of a swap included in net assets is the unrealized gain or loss on the contract plus or minus any unamortized premiums paid or received, respectively. Appreciated swaps and premiums paid are reflected as assets, and depreciated swaps and premiums received are reflected as liabilities on the accompanying Statement of Assets and Liabilities. Net periodic receipts or payments required by swaps are accrued daily and are recorded as realized gain or loss for financial reporting purposes; fluctuations in the fair value of swaps are reflected in the change in net unrealized gain or loss and are reclassified to realized gain or loss upon termination prior to maturity or cash settlement. Risks related to the use of credit default swaps include the possible inability of the fund to accurately assess the current and future creditworthiness of underlying issuers, the possible failure of a counterparty to perform in accordance with the terms of the swap agreements, potential government regulation that could adversely affect the fund’s swap investments, and potential losses in excess of the fund’s initial investment.
NOTE 4 - OTHER INVESTMENT TRANSACTIONS
Consistent with its investment objective, the fund engages in the following practices to manage exposure to certain risks and/or to enhance performance. The investment objective, policies, program, and risk factors of the fund are described more fully in the fund’s prospectus and Statement of Additional Information.
Noninvestment-Grade Debt Securities At May 31, 2011, approximately 96% of the fund’s net assets were invested, either directly or through its investment in T. Rowe Price institutional funds, in noninvestment-grade debt securities, commonly referred to as “high yield” or “junk” bonds. The noninvestment-grade bond market may experience sudden and sharp price swings due to a variety of factors, including changes in economic forecasts, stock market activity, large sustained sales by major investors, a high-profile default, or a change in the market’s psychology. These events may decrease the ability of issuers to make principal and interest payments and adversely affect the liquidity or value, or both, of such securities.
Restricted Securities The fund may invest in securities that are subject to legal or contractual restrictions on resale. Prompt sale of such securities at an acceptable price may be difficult and may involve substantial delays and additional costs.
Bank Loans The fund may invest in bank loans, which represent an interest in amounts owed by a borrower to a syndication of lenders. Bank loans may involve multiple loans with the same borrower under a single credit agreement (each loan, a tranche) and each tranche may have different terms and associated risks. A bank or other financial institution typically acts as the agent and administers a bank loan in accordance with the associated credit agreement. Bank loans are generally noninvestment grade and often involve borrowers whose financial condition is troubled or uncertain and companies that are highly leveraged. The fund may buy and sell bank loans in the form of either loan assignments or loan participations. A loan assignment transfers all legal, beneficial, and economic rights to the buyer. Although loan assignments continue to be administered by the agent, the buyer acquires direct rights against the borrower. In many cases, a loan assignment requires the consent of both the borrower and the agent. In contrast, a loan participation generally entitles the buyer to receive the cash flows from principal, interest, and any fee payments that the seller is entitled to receive from the borrower; however, the seller continues to hold legal title to the loan. As a result, with loan participations, the buyer generally has no right to enforce compliance with the terms of the credit agreement against the borrower, and the buyer is subject to the credit risk of both the borrower and the seller. Bank loans often have extended settlement periods, during which the fund is subject to nonperformance by the counterparty. A portion of the fund’s bank loans may require additional principal to be funded at the borrowers’ discretion at a later date (unfunded commitments) and bank loans usually may be repaid at any time at the option of the borrower. The fund reflects both the funded portion of the bank loan as well as any unfunded commitment on the loan in the Portfolio of Investments.
Certain credit agreements include tranches that provide no initial funding, but may require the full principal commitment to be funded at a future date(s) at the borrower’s discretion. Such agreements are not reflected in the Portfolio of Investments until funded. At May 31, 2011, the value of the fund’s total unfunded commitments was $5,290,000, consisting of commitments to fund $3,149,000 and €1,500,000.
Counterparty Risk and Collateral The fund has entered into collateral agreements with certain counterparties to mitigate counterparty risk associated with certain over-the-counter (OTC) financial instruments, including swaps, forward currency exchange contracts, TBA purchase commitments, and OTC options (collectively, covered OTC instruments). Subject to certain minimum exposure requirements (which typically range from $100,000 to $500,000), collateral requirements generally are determined and transfers made based on the net aggregate unrealized gain or loss on all covered OTC instruments covered by a particular collateral agreement with a specified counterparty. Collateral, both pledged by the fund to a counterparty and pledged by a counterparty to the fund, is held in a segregated account by a third-party agent and can be in the form of cash or debt securities issued by the U.S. government or related agencies. Securities posted as collateral by the fund to a counterparty are so noted in the accompanying Portfolio of Investments and remain in the fund’s net assets. In accordance with GAAP, cash pledged by counterparties to the fund is included in the fund’s net assets, however, securities pledged by counterparties to the fund are not recorded by the fund. As of May 31, 2011, no collateral was pledged by either the fund or counterparties.
At any point in time, the fund’s risk of loss from counterparty credit risk on covered OTC instruments is the aggregate unrealized gain on appreciated covered OTC instruments in excess of collateral, if any, pledged by the counterparty to the fund. In accordance with the terms of the relevant derivatives agreements, counterparties to OTC derivatives may be able to terminate derivative contracts prior to maturity after the occurrence of certain stated events, such as a decline in net assets above a certain percentage or a failure by the fund to perform its obligations under the contract. Upon termination, all transactions would typically be liquidated and a net amount would be owed by or payable to the fund.
Other Purchases and sales of portfolio securities other than short-term securities aggregated $1,724,585,000 and $731,617,000, respectively, for the year ended May 31, 2011.
NOTE 5 - FEDERAL INCOME TAXES
No provision for federal income taxes is required since the fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code and distribute to shareholders all of its taxable income and gains. Distributions determined in accordance with federal income tax regulations may differ in amount or character from net investment income and realized gains for financial reporting purposes. Financial reporting records are adjusted for permanent book/tax differences to reflect tax character but are not adjusted for temporary differences.
The fund files U.S. federal, state, and local tax returns as required. The fund’s tax returns are subject to examination by the relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return but which can be extended to six years in certain circumstances. Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.
Reclassifications between income and gain relate primarily to differences between book/tax amortization policies. For the year ended May 31, 2011, the following reclassifications were recorded to reflect tax character; there was no impact on results of operations or net assets:
Distributions during the years ended May 31, 2011 and May 31, 2010, totaled $64,249,000 and $50,982,000, respectively, and were characterized as ordinary income for tax purposes. At May 31, 2011, the tax-basis cost of investments and components of net assets were as follows:
During the year ended May 31, 2011, the fund utilized $17,019,000 of capital loss carryforwards. In accordance with federal income tax regulations applicable to investment companies, recognition of capital and/or currency losses on certain transactions realized between November 1 and the fund’s fiscal year-end is deferred for tax purposes until the subsequent year (post-October loss deferrals); however, such losses are recognized for financial reporting purposes in the year realized.
NOTE 6 - RELATED PARTY TRANSACTIONS
The fund is managed by T. Rowe Price Associates, Inc. (Price Associates), a wholly owned subsidiary of T. Rowe Price Group, Inc. (Price Group). The investment management and administrative agreement between the fund and Price Associates provides for an all-inclusive annual fee equal to 0.55% of the fund’s average daily net assets. The fee is computed daily and paid monthly. The all-inclusive fee covers investment management, shareholder servicing, transfer agency, accounting, and custody services provided to the fund, as well as fund directors’ fees and expenses; interest, taxes, brokerage commissions, and extraordinary expenses are paid directly by the fund.
The fund may invest in the T. Rowe Price Reserve Investment Fund and the T. Rowe Price Government Reserve Investment Fund (collectively, the T. Rowe Price Reserve Investment Funds), open-end management investment companies managed by Price Associates and considered affiliates of the fund. The T. Rowe Price Reserve Investment Funds are offered as cash management options to mutual funds, trusts, and other accounts managed by Price Associates and/or its affiliates and are not available for direct purchase by members of the public. The T. Rowe Price Reserve Investment Funds pay no investment management fees.
Mutual funds and other accounts managed by T. Rowe Price and its affiliates (collectively, T. Rowe Price funds) may invest in the fund; however, no T. Rowe Price fund may invest for the purpose of exercising management or control over the fund. At May 31, 2011, approximately 63% of the Institutional Class’s outstanding shares were held by T. Rowe Price funds.
Report of Independent Registered Public Accounting Firm
To the Board of Directors of T. Rowe Price Institutional Income Funds, Inc. and Shareholders of T. Rowe
Price Institutional Floating Rate Fund
In our opinion, the accompanying statement of assets and liabilities, including the portfolio of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of T. Rowe Price Institutional Floating Rate Fund (one of the portfolios comprising T. Rowe Price Institutional Income Funds, Inc., hereafter referred to as the “Fund”) at May 31, 2011, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the fiscal periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Fund’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at May 31, 2011 by correspondence with the custodian, and confirmation of the underlying fund by correspondence with the transfer agent, provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Baltimore, Maryland
July 15, 2011
| Tax Information (Unaudited) for the Tax Year Ended 5/31/11 |
We are providing this information as required by the Internal Revenue Code. The amounts shown may differ from those elsewhere in this report because of differences between tax and financial reporting requirements.
The fund’s distributions to shareholders included $1,398,000 from short-term capital gains.
| Information on Proxy Voting Policies, Procedures, and Records |
A description of the policies and procedures used by T. Rowe Price funds and portfolios to determine how to vote proxies relating to portfolio securities is available in each fund’s Statement of Additional Information, which you may request by calling 1-800-225-5132 or by accessing the SEC’s website, sec.gov. The description of our proxy voting policies and procedures is also available on our website, troweprice.com. To access it, click on the words “Our Company” at the top of our corporate homepage. Then, when the next page appears, click on the words “Proxy Voting Policies” on the left side of the page.
Each fund’s most recent annual proxy voting record is available on our website and through the SEC’s website. To access it through our website, follow the directions above, then click on the words “Proxy Voting Records” on the right side of the Proxy Voting Policies page.
| How to Obtain Quarterly Portfolio Holdings |
The fund files a complete schedule of portfolio holdings with the Securities and Exchange Commission for the first and third quarters of each fiscal year on Form N-Q. The fund’s Form N-Q is available electronically on the SEC’s website (sec.gov); hard copies may be reviewed and copied at the SEC’s Public Reference Room, 450 Fifth St. N.W., Washington, DC 20549. For more information on the Public Reference Room, call 1-800-SEC-0330.
| Approval of Investment Management Agreement |
On March 9, 2011, the fund’s Board of Directors (Board) unanimously approved the continuation of the investment advisory contract (Contract) between the fund and its investment advisor, T. Rowe Price Associates, Inc. (Advisor). The Board considered a variety of factors in connection with its review of the Contract, also taking into account information provided by the Advisor during the course of the year, as discussed below:
Services Provided by the Advisor
The Board considered the nature, quality, and extent of the services provided to the fund by the Advisor. These services included, but were not limited to, management of the fund’s portfolio and a variety of related activities, as well as financial and administrative services, reporting, and communications. The Board also reviewed the background and experience of the Advisor’s senior management team and investment personnel involved in the management of the fund. The Board concluded that it was satisfied with the nature, quality, and extent of the services provided by the Advisor.
Investment Performance of the Fund
The Board reviewed the fund’s average annual total returns over the one-year and since-inception periods, as well as the fund’s year-by-year returns, and compared these returns with a wide variety of previously agreed upon comparable performance measures and market data, including those supplied by Lipper and Morningstar, which are independent providers of mutual fund data. On the basis of this evaluation and the Board’s ongoing review of investment results, and factoring in the relative market conditions during certain of the performance periods, the Board concluded that the fund’s performance was satisfactory.
Costs, Benefits, Profits, and Economies of Scale
The Board reviewed detailed information regarding the revenues received by the Advisor under the Contract and other benefits that the Advisor (and its affiliates) may have realized from its relationship with the fund, including research received under “soft dollar” agreements and commission-sharing arrangements with broker-dealers. The Board considered that the Advisor may receive some benefit from soft-dollar arrangements pursuant to which research is received from broker-dealers that execute the applicable fund’s portfolio transactions. The Board also received information on the estimated costs incurred and profits realized by the Advisor and its affiliates from advising T. Rowe Price mutual funds, as well as estimates of the gross profits realized from managing the fund in particular. The Board concluded that the Advisor’s profits were reasonable in light of the services provided to the fund. The Board also considered whether the fund or other funds benefit under the fee levels set forth in the Contract from any economies of scale realized by the Advisor. The Board noted that, under the Contract, the fund pays the Advisor a single fee based on the fund’s assets and that the Advisor, in turn, pays all expenses of the fund, with certain exceptions. The Board concluded that, based on the profitability data it reviewed and consistent with this single-fee structure, the Contract provided for a reasonable sharing of any benefits from economies of scale with the fund.
Fees
The Board reviewed the fund’s single-fee structure and total expense ratio (for the Institutional Class and the F Class) and compared them with fees and expenses of other comparable funds based on information and data supplied by Lipper. The information provided to the Board indicated that the fund’s management fee rate was at or below the median for comparable funds and the total expense ratio (for both classes) was below the median for comparable funds. (For these purposes, the Board assumed the fund’s management fee rate was equal to the single fee less the fund’s operating expenses and reductions of the management fee that resulted from fee waivers and/or expenses paid by the Advisor.) The Board also reviewed the fee schedules for institutional accounts of the Advisor and its affiliates with similar mandates. Management provided the Board with information about the Advisor’s responsibilities and services provided to institutional account clients, which are more limited than its responsibilities for the fund and other T. Rowe Price mutual funds that it advises, and showing that the Advisor performs significant additional services and assumes greater risk for the fund and other T. Rowe Price mutual funds that it advises than it does for institutional account clients. On the basis of the information provided, the Board concluded that the fees paid by the fund under the Contract were reasonable.
Approval of the Contract
As noted, the Board approved the continuation of the Contract. No single factor was considered in isolation or to be determinative to the decision. Rather, the Board was assisted by the advice of independent legal counsel and concluded, in light of a weighting and balancing of all factors considered, that it was in the best interests of the fund to approve the continuation of the Contract (including the fees to be charged for services thereunder).
| About the Fund’s Directors and Officers |
Your fund is overseen by a Board of Directors (Board) that meets regularly to review a wide variety of matters affecting the fund, including performance, investment programs, compliance matters, advisory fees and expenses, service providers, and other business affairs. The Board elects the fund’s officers, who are listed in the final table. At least 75% of the Board’s members are independent of T. Rowe Price Associates, Inc. (T. Rowe Price), and its affiliates; “inside” or “interested” directors are employees or officers of T. Rowe Price. The business address of each director and officer is 100 East Pratt Street, Baltimore, Maryland 21202. The Statement of Additional Information includes additional information about the fund directors and is available without charge by calling a T. Rowe Price representative at 1-800-225-5132.
| Independent Directors | |
| |
| Name (Year of Birth) | Principal Occupation(s) and Directorships of Public Companies and Other Investment Companies |
| Year Elected* | During the Past Five Years |
| | |
| William R. Brody (1944) | President and Trustee, Salk Institute for Biological Studies (2009 to present); Director, Novartis, Inc. (2009 |
| 2009 | to present); Director, IBM (2007 to present); President and Trustee, Johns Hopkins University (1996 to 2009); |
| | Chairman of Executive Committee and Trustee, Johns Hopkins Health System (1996 to 2009) |
| | |
| Jeremiah E. Casey (1940) | Retired |
| 2006 | |
| | |
| Anthony W. Deering | Chairman, Exeter Capital, LLC, a private investment firm (2004 to present); Director, Under Armour (2008 to |
| (1945) | present); Director, Vornado Real Estate Investment Trust (2004 to present); Director, Mercantile Bankshares |
| 2002 | (2002 to 2007); Member, Advisory Board, Deutsche Bank North America (2004 to present) |
| | |
| Donald W. Dick, Jr. (1943) | Principal, EuroCapital Partners, LLC, an acquisition and management advisory firm (1995 to present) |
| 2002 | |
| | |
| Karen N. Horn (1943) | Senior Managing Director, Brock Capital Group, an advisory and investment banking firm (2004 to present); |
| 2003 | Director, Eli Lilly and Company (1987 to present); Director, Simon Property Group (2004 to present); Director, |
| | Norfolk Southern (2008 to present); Director, Fannie Mae (2006 to 2008) |
| | |
| Theo C. Rodgers (1941) | President, A&R Development Corporation (1977 to present) |
| 2005 | |
| | |
| John G. Schreiber (1946) | Owner/President, Centaur Capital Partners, Inc., a real estate investment company (1991 to present); Cofounder |
| 2002 | and Partner, Blackstone Real Estate Advisors, L.P. (1992 to present); Director, General Growth Properties, Inc. |
| | (2010 to present) |
| | |
| Mark R. Tercek (1957) | President and Chief Executive Officer, The Nature Conservancy (2008 to present); Managing Director, The Goldman |
| 2009 | Sachs Group, Inc. (1984 to 2008) |
| |
| *Each independent director oversees 129 T. Rowe Price portfolios and serves until retirement, resignation, or election of a successor. |
| | |
| Inside Directors | |
| |
| Name (Year of Birth) | |
| Year Elected* [Number of T. Rowe | Principal Occupation(s) and Directorships of Public Companies and Other Investment Companies |
| Price Portfolios Overseen] | During the Past Five Years |
| | |
| Edward C. Bernard (1956) | Director and Vice President, T. Rowe Price; Vice Chairman of the Board, Director, and Vice President, T. Rowe Price |
| 2006 [129] | Group, Inc.; Chairman of the Board, Director, and President, T. Rowe Price Investment Services, Inc.; Chairman |
| | of the Board and Director, T. Rowe Price Retirement Plan Services, Inc., T. Rowe Price Savings Bank, and T. Rowe |
| | Price Services, Inc.; Chairman of the Board, Chief Executive Officer, and Director, T. Rowe Price International; |
| | Chief Executive Officer, Chairman of the Board, Director, and President, T. Rowe Price Trust Company; Chairman |
| | of the Board, all funds |
| | |
| Michael C. Gitlin (1970) | Director of Fixed Income, T. Rowe Price (2009 to present); Global Head of Trading, T. Rowe Price (2007 to 2009); |
| 2010 [39] | Vice President, Price Hong Kong, Price Singapore, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| | International; formerly Head of U.S. Equity Sales, Citigroup Global Markets (2005 to 2007) |
| |
| *Each inside director serves until retirement, resignation, or election of a successor. |
| Officers | |
| |
| Name (Year of Birth) | |
| Position Held With Institutional Income Funds | Principal Occupation(s) |
| | |
| Brian J. Brennan, CFA (1964) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price |
| Executive Vice President | International, and T. Rowe Price Trust Company |
| | |
| Andrew M. Brooks (1956) | Vice President, T. Rowe Price and T. Rowe Price Group, Inc. |
| Vice President | |
| | |
| Michael J. Conelius, CFA (1964) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price |
| Vice President | International, and T. Rowe Price Trust Company |
| | |
| Roger L. Fiery III, CPA (1959) | Vice President, Price Hong Kong, Price Singapore, T. Rowe Price, T. Rowe |
| Vice President | Price Group, Inc., T. Rowe Price International, and T. Rowe Price Trust |
| | Company |
| | |
| Justin T. Gerbereux, CFA (1975) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| Executive Vice President | Trust Company |
| | |
| John R. Gilner (1961) | Chief Compliance Officer and Vice President, T. Rowe Price; Vice President, |
| Chief Compliance Officer | T. Rowe Price Group, Inc., and T. Rowe Price Investment Services, Inc. |
| | |
| David R. Giroux, CFA (1975) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| Vice President | Trust Company |
| | |
| Gregory S. Golczewski (1966) | Vice President, T. Rowe Price and T. Rowe Price Trust Company |
| Vice President | |
| | |
| Gregory K. Hinkle, CPA (1958) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| Treasurer | Trust Company; formerly Partner, PricewaterhouseCoopers LLP (to 2007) |
| | |
| Steven C. Huber, CFA, FSA (1958) | Vice President, T. Rowe Price and T. Rowe Price Group, Inc.; formerly |
| Vice President | Chief Investment Officer, Maryland State Retirement Agency pension |
| | fund (to 2006) |
| | |
| Paul A. Karpers, CFA (1967) | Vice President, T. Rowe Price and T. Rowe Price Group, Inc. |
| Executive Vice President | |
| | |
| Ian D. Kelson (1956) | President–International Fixed Income, T. Rowe Price International; |
| Vice President | Vice President, T. Rowe Price and T. Rowe Price Group, Inc. |
| | |
| Patricia B. Lippert (1953) | Assistant Vice President, T. Rowe Price and T. Rowe Price Investment |
| Secretary | Services, Inc. |
| | |
| Paul M. Massaro, CFA (1975) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| Executive Vice President | Trust Company |
| | |
| Andrew C. McCormick (1960) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| Vice President | Trust Company; formerly Chief Investment Officer, IMPAC Mortgage Holdings |
| | (to 2008); Senior Portfolio Manager, Avenue Capital Group (to 2006) |
| | |
| Michael J. McGonigle (1966) | Vice President, T. Rowe Price and T. Rowe Price Group, Inc. |
| Vice President | |
| | |
| David Oestreicher (1967) | Director and Vice President, T. Rowe Price Investment Services, Inc., |
| Vice President | T. Rowe Price Trust Company, and T. Rowe Price Services, Inc.; Vice |
| | President, Price Hong Kong, Price Singapore, T. Rowe Price, T. Rowe Price |
| | Group, Inc., T. Rowe Price International, and T. Rowe Price Retirement |
| | Plan Services, Inc. |
| | |
| Brian A. Rubin, CPA (1974) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| Assistant Vice President | Trust Company |
| | |
| Deborah D. Seidel (1962) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price |
| Vice President | Investment Services, Inc., and T. Rowe Price Services, Inc. |
| | |
| Daniel O. Shackelford, CFA (1958) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| Vice President | Trust Company |
| | |
| Walter P. Stuart III, CFA (1960) | Vice President, T. Rowe Price and T. Rowe Price Group, Inc. |
| Vice President | |
| | |
| Thomas E. Tewksbury (1961) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| Vice President | Trust Company |
| | |
| David A. Tiberii, CFA (1965) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., T. Rowe Price |
| Vice President | International, and T. Rowe Price Trust Company |
| | |
| Mark J. Vaselkiv (1958) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| President | Trust Company |
| | |
| Julie L. Waples (1970) | Vice President, T. Rowe Price |
| Vice President | |
| | |
| Thea N. Williams (1961) | Vice President, T. Rowe Price, T. Rowe Price Group, Inc., and T. Rowe Price |
| Vice President | Trust Company |
| |
| Unless otherwise noted, officers have been employees of T. Rowe Price or T. Rowe Price International for at least 5 years. |
Item 2. Code of Ethics.
The registrant has adopted a code of ethics, as defined in Item 2 of Form N-CSR, applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. A copy of this code of ethics is filed as an exhibit to this Form N-CSR. No substantive amendments were approved or waivers were granted to this code of ethics during the period covered by this report.
Item 3. Audit Committee Financial Expert.
The registrant’s Board of Directors/Trustees has determined that Mr. Anthony W. Deering qualifies as an audit committee financial expert, as defined in Item 3 of Form N-CSR. Mr. Deering is considered independent for purposes of Item 3 of Form N-CSR.
Item 4. Principal Accountant Fees and Services.
(a) – (d) Aggregate fees billed to the registrant for the last two fiscal years for professional services rendered by the registrant’s principal accountant were as follows:
Audit fees include amounts related to the audit of the registrant’s annual financial statements and services normally provided by the accountant in connection with statutory and regulatory filings. Audit-related fees include amounts reasonably related to the performance of the audit of the registrant’s financial statements and specifically include the issuance of a report on internal controls and, if applicable, agreed-upon procedures related to fund acquisitions. Tax fees include amounts related to services for tax compliance, tax planning, and tax advice. The nature of these services specifically includes the review of distribution calculations and the preparation of Federal, state, and excise tax returns. All other fees include the registrant’s pro-rata share of amounts for agreed-upon procedures in conjunction with service contract approvals by the registrant’s Board of Directors/Trustees.
(e)(1) The registrant’s audit committee has adopted a policy whereby audit and non-audit services performed by the registrant’s principal accountant for the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant require pre-approval in advance at regularly scheduled audit committee meetings. If such a service is required between regularly scheduled audit committee meetings, pre-approval may be authorized by one audit committee member with ratification at the next scheduled audit committee meeting. Waiver of pre-approval for audit or non-audit services requiring fees of a de minimis amount is not permitted.
(2) No services included in (b) – (d) above were approved pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Less than 50 percent of the hours expended on the principal accountant’s engagement to audit the registrant’s financial statements for the most recent fiscal year were attributed to work performed by persons other than the principal accountant’s full-time, permanent employees.
(g) The aggregate fees billed for the most recent fiscal year and the preceding fiscal year by the registrant’s principal accountant for non-audit services rendered to the registrant, its investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant were $1,226,000 and $1,879,000, respectively, and were less than the aggregate fees billed for those same periods by the registrant’s principal accountant for audit services rendered to the T. Rowe Price Funds.
(h) All non-audit services rendered in (g) above were pre-approved by the registrant’s audit committee. Accordingly, these services were considered by the registrant’s audit committee in maintaining the principal accountant’s independence.
Item 5. Audit Committee of Listed Registrants.
Not applicable.
Item 6. Schedule of Investments.
Not applicable. The complete schedule of investments is included in Item 1 of this Form N-CSR.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
Not applicable.
Item 8. Portfolio Managers of Closed-End Management Investment Companies.
Not applicable.
Item 9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.
Not applicable.
Item 10. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 11. Controls and Procedures.
(a) The registrant’s principal executive officer and principal financial officer have evaluated the registrant’s disclosure controls and procedures within 90 days of this filing and have concluded that the registrant’s disclosure controls and procedures were effective, as of that date, in ensuring that information required to be disclosed by the registrant in this Form N-CSR was recorded, processed, summarized, and reported timely.
(b) The registrant’s principal executive officer and principal financial officer are aware of no change in the registrant’s internal control over financial reporting that occurred during the registrant’s second fiscal quarter covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
Item 12. Exhibits.
(a)(1) The registrant’s code of ethics pursuant to Item 2 of Form N-CSR is attached.
(2) Separate certifications by the registrant's principal executive officer and principal financial officer, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(a) under the Investment Company Act of 1940, are attached.
(3) Written solicitation to repurchase securities issued by closed-end companies: not applicable.
(b) A certification by the registrant's principal executive officer and principal financial officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and required by Rule 30a-2(b) under the Investment Company Act of 1940, is attached.
| | |
SIGNATURES |
| |
| | Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment |
| Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the |
| undersigned, thereunto duly authorized. |
| |
| T. Rowe Price Institutional Income Funds, Inc. |
| |
| |
| By | /s/ Edward C. Bernard |
| | Edward C. Bernard |
| | Principal Executive Officer |
| |
| Date | July 15, 2011 |
| |
| |
| |
| | Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment |
| Company Act of 1940, this report has been signed below by the following persons on behalf of |
| the registrant and in the capacities and on the dates indicated. |
| |
| |
| By | /s/ Edward C. Bernard |
| | Edward C. Bernard |
| | Principal Executive Officer |
| |
| Date | July 15, 2011 |
| |
| |
| |
| By | /s/ Gregory K. Hinkle |
| | Gregory K. Hinkle |
| | Principal Financial Officer |
| |
| Date | July 15, 2011 |
