UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-09229
811-10171
Name of Fund: Merrill Lynch Senior Floating Rate Fund II, Inc.
Master Senior Floating Rate Trust
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Merrill Lynch Senior Floating Rate Fund II, Inc. and Master
Senior Floating Rate Trust, 800 Scudders Mill Road, Plainsboro, NJ,
08536. Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 08/31/06
Date of reporting period: 09/01/05 - 02/28/06
Item 1 - Report to Stockholders
Semi-Annual Report
February 28, 2006
Merrill Lynch
Senior Floating
Rate Fund II, Inc.
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Merrill Lynch Senior Floating Rate Fund II, Inc. seeks as high a level of
current income and such preservation of capital as is consistent with
investment in senior collateralized corporate loans made by banks and other
financial institutions.
This report, including the financial information herein, is transmitted for
use only to the shareholders of Merrill Lynch Senior Floating Rate Fund II,
Inc. for their information. It is not a prospectus, circular or representation
intended for use in the purchase of shares of the Fund or any securities
mentioned in the report. Past performance results shown in this report should
not be considered a representation of future performance.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and
(2) on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Merrill Lynch Senior Floating Rate Fund II, Inc.
Box 9011
Princeton, NJ 08543-9011
(GO PAPERLESS LOGO)
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To sign up today, go to www.icsdelivery.com/live.
Merrill Lynch Senior Floating Rate Fund II, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with nearly $1 trillion in assets under management (based on combined
assets under management as of December 31, 2005). The transaction is expected
to close in the third quarter of 2006, at which time the new company will
operate under the BlackRock name. If approved by the Fund's/Trust's Board of
Directors/Trustees and Fund/Trust shareholders, the combined company that
results from the transaction is expected to become the investment adviser of
the Fund/Trust.
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
A Letter From the President
Dear Shareholder
Financial markets began 2006 with a return to volatility following a fairly
uninspiring 2005. For the six- and 12-month periods ended February 28, 2006,
most major market indexes landed in positive territory:
Total Returns as of February 28, 2006 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 5.93% + 8.40%
Small cap U.S. equities (Russell 2000 Index) +10.24 +16.59
International equities (MSCI Europe, Australasia, Far East Index) +15.14 +17.41
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.11 + 2.74
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.99 + 3.87
High yield bonds (Credit Suisse High Yield Index) + 1.89 + 3.27
The Federal Reserve Board (the Fed) increased interest rates 200 basis points
(2.00%) over the past 12 months, bringing the target federal funds rate to
4.5%. Notably, Ben Bernanke replaced Alan Greenspan as Fed chairman in
January, a month after the central bank removed the critical word "measured"
from the description of its rate-hiking program. Still, most observers expect
at least one more interest rate hike before the Fed pauses in its tightening
campaign.
U.S. economic growth, which came in at 4.1% in the third quarter of 2005, fell
to 1.6% in the fourth quarter. Growth is expected to reaccelerate in the first
quarter of 2006, although the economy is likely to feel some pressure in the
quarters ahead as the consumer sector seems to be softening. Capital spending
by businesses, however, appears relatively strong. Overall corporate health,
including strong company balance sheets, helped prompt robust dividend-
distribution, share-buyback and merger-and-acquisition activity in 2005, a
trend that has continued in 2006. This, as well as reasonably good company
earnings and low core inflation, has been supportive of U.S. stocks despite
the headwinds of rising interest rates and high energy prices. Many
international equity markets have fared even better, thanks in part to higher
economic growth rates and low inflation.
In the U.S. bond market, short-term interest rates continued to move higher as
longer-term interest rates advanced more moderately. After flattening
dramatically in 2005, the Treasury curve recently has been toying with bouts
of inversion, whereby short-term yields have surpassed long-term yields. At
period-end, the six-month Treasury bill offered the highest yield on the
curve at 4.74%.
Amid the uncertainty inherent in the financial markets, we encourage
you to review your goals periodically with your financial advisor and
to make portfolio changes, as needed. For timely "food for thought" for
investors, we also invite you to visit Shareholder magazine at
www.mlim.ml.com/shareholdermagazine. As always, we thank you for
trusting Merrill Lynch Investment Managers with your investment assets,
and we look forward to continuing to serve your investment needs.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director/Trustee
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
A Discussion With Your Fund's Portfolio Manager
We continued to follow our credit-driven investment process in seeking out
opportunities in the leveraged loan market that could offer attractive yields
and total return potential for the portfolio.
Describe the recent market environment.
The bank loan market recorded another strong year in 2005, benefiting from
increasing demand for the securities from issuers of collateralized loan
obligations (CLOs), which kept prices at or above par value. The market also
benefited from the rising London InterBank Offered Rate (LIBOR), which
increased 95 basis points (.95%) to 4.82% during the six-month reporting
period, and decreasing spreads. Investors earned total returns consisting
mainly of interest payments, as there were only marginal price changes. Fund
flows for 2005 totaled $151.6 billion. There were $141.8 billion in new issues
through November and a preliminary amount of $8.4 billion issued in December.
The numbers add up to $1.4 billion in excess cash before factoring in
repayments and loans taken by proprietary accounts, both of which would
increase the excess cash in the market. For the six months ended February 28,
2006, the bank loan market, as measured by the Credit Suisse Leveraged Loan
Index, returned +3.02%.
For the first two months of 2006, the Index returned +1.36%. CLO issuance
continued to drive supply and demand in the market. Approximately $50.9
billion in new institutional leveraged loans was issued during the first two
months of the year. A slowdown in issuance in February led to continued
tightening in the institutional loan market, although repayment activity
offset the lull in loan issuance for the month. Each week in February saw
repayment levels in excess of the 12-month average, with a spike for the last
full week of the month that was greater than three times the average. We
believe this may mark the beginning of the next refinancing trend.
It appears that yield spreads on leveraged loans may fall again. With strong
CLO issuance for the first two months of 2006 and relatively constrained loan
supply, prices most likely will rise and, more importantly, refinancing
activity may increase. Changes to leverage loan ratings currently under
consideration by Moody's Investors Service, a credit rating and research firm,
may allow greater leverage on new structures that could exacerbate the spread
tightening. The current relatively benign credit environment also could
contribute to lower spreads. As we previously noted, we believe this trend of
tightening loan spreads will continue until the current credit cycle reverses.
Standard & Poor's Leveraged Commentary & Data reported a default rate of 2.09%
based on the number of loans at the end of February, a 26-month high. Despite
the increase, the rate is still below the historical average of 3.56%.
Although defaults are expected to continue to increase, we do not expect
default rates to rise significantly above 3% for 2006.
High yield bonds, in which the Fund may invest up to 20% of its assets,
returned +1.89% for the six-month period, as measured by the Credit Suisse
High Yield Index. Much of the gain occurred in the first two months of 2006,
as the high yield market benefited from increasing strength in the U.S.
economy.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended February 28, 2006, the Common Stock of Merrill
Lynch Senior Floating Rate Fund II, Inc. had a net annualized yield of 5.41%,
based on a period-end per share net asset value of $9.79 and $.262 per share
income dividends. For the same period, the total investment return on the
Fund's Common Stock was +2.62%, based on an unchanged per share net asset
value of $9.79, and assuming reinvestment of all distributions. For the same
period, the Fund's benchmark, the Credit Suisse Leveraged Loan Index, returned
+3.02%.
Security selection in the chemicals, utilities and U.S. cable sectors
detracted from Fund results. Conversely, our positions in the health care,
telecommunication services and services sectors contributed positively to
performance for the period.
Fund performance in the chemicals sector was hindered mainly by our holdings
in the common stock and floating rate notes of GEO Specialty Chemicals, Inc.,
manufacturer of a diverse range of products that are sold through five
business segments: electronics, paints and coatings, construction, water
treatment and rubber additives. High energy and raw materials prices hurt
GEO's profit margins as its costs rose faster than the prices of its products.
This trend has abated in the near term, and we believe 2006 will be a key
turnaround year for the company.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
In the utility sector, our positions in first- and second-lien loans of
Calpine Corporation, an independent power producer, detracted from
performance. We sold the issues after an adverse court ruling left the
company's liquidity seriously impaired, leading to a bankruptcy filing in
December 2005. The second-lien loan declined more significantly in price
following the bankruptcy filing than the first lien. Finally, in the U.S.
cable sector, our positions in Century Communications Corp. and Olympus
Communications L.P. loans had a negative effect on Fund results. Both
companies are part of the Adelphia Communications Corp. family and the values
of the securities declined on speculation that their exits from bankruptcy
might be delayed.
On the positive side, the price of our holding in healthcare name Medical
Specialties Group, Inc. rose significantly. When we liquidated our position
following the rally, we realized a gain over our then-current carrying value
(a company's total assets minus intangible assets and liabilities, such as
debt). The strong performance in telecommunication services resulted primarily
from our positions in Qwest Communications International Inc. and Winstar LLC.
Qwest reported very good fourth quarter results, and our security's
performance improved as a result of the cost restructuring steps initiated by
the company's management. Winstar was a previously defaulted security that
benefited from a favorable court decision for the company in its lawsuit
against Lucent Technologies, Inc. Winstar had accused Lucent of breaching a
strategic partnership contract. We subsequently sold our position in the
security, as we believe the risk of an appeal by Lucent overshadows the
possibility of further price gains. Fund performance in the services sector
benefited from our position in the common stock of The Shaw Group, Inc. The
Fund received shares in this engineering/consulting firm as part of the
restructuring of IT Group, which The Shaw Group purchased in 2002. The company
has experienced better-than-expected earnings, which boosted the stock's share
price from $21.10 to $29.05, at which point we liquidated our position.
What changes were made to the portfolio during the period?
We did not make significant changes to the Fund's sector allocations during
the period, nor did we employ leveraging strategies in the portfolio.
During the period, Master Senior Floating Rate Trust (the Trust), the master
portfolio into which the Fund is a feeder, purchased assets of approximately
$211.3 million in par amount (face value) and experienced $222.2 million in
repayments from issuers. In addition, we sold roughly $33.8 million in assets
during the period while attempting to minimize sales, given our desire to
maintain a relatively small cash position.
How would you characterize the portfolio's position at the close of the
period?
At the end of the period, the Trust was composed of 163 issuers spread among
29 industries. The Fund was underweight versus its benchmark in securities
rated Ba or better and credits rated Caa or below, and there were overweight
positions in B-rated and unrated securities. The portfolio's overall credit
quality effectively is positioned more to the center of the leveraged loan
market.
We anticipate that many of the same factors that influenced the leveraged loan
market in the past year will remain intact. We believe the trend of less
frequent new-loan issuance, lower interest rate spreads and above-par
secondary market prices will continue, especially given the benign credit
environment that we expect over the next year. A further benefit to the market
should be an increase in the three-month LIBOR. Consequently, we intend to
continue to purchase assets predominantly in the primary market, while
selectively participating in the secondary market.
Joseph P. Matteo
Vice President and Portfolio Manager
March 14, 2006
Effective March 31, 2006, Kevin J. Booth is primarily responsible for the
day-to-day management of the Fund's portfolio. Mr. Booth has been a Director
(Global Fixed Income) of Merrill Lynch Investment Managers, L.P. (MLIM) since
2000 and was a Vice President of MLIM from 1994 to 2000.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Disclosure of Expenses
Shareholders of this Fund may incur the following charges: (a) expenses
related to transactions, including sales charges, redemption fees and exchange
fees; and (b) operating expenses, including advisory fees, distribution fees
including 12b-1 fees, and other Fund expenses. The following example (which is
based on a hypothetical investment of $1,000 invested on September 1, 2005 and
held through February 28, 2006) is intended to assist shareholders both in
calculating expenses based on an investment in the Fund and in comparing these
expenses with similar costs of investing in other mutual funds.
The first table below provides information about actual account values and
actual expenses. In order to estimate the expenses a shareholder paid during
the period covered by this report, shareholders can divide their account value
by $1,000 and then multiply the result by the number in the first line under
the heading entitled "Expenses Paid During the Period."
The second table below provides information about hypothetical account values
and hypothetical expenses based on the Fund's actual expense ratio and an
assumed rate of return of 5% per year before expenses. In order to assist
shareholders in comparing the ongoing expenses of investing in this Fund and
other funds, compare the 5% hypothetical example with the 5% hypothetical
examples that appear in other funds' shareholder reports.
The expenses shown in the table are intended to highlight shareholders'
ongoing costs only and do not reflect any transactional expenses, such as
sales charges, redemption fees or exchange fees. Therefore, the second table
is useful in comparing ongoing expenses only, and will not help shareholders
determine the relative total expenses of owning different funds. If these
transactional expenses were included, shareholder expenses would have been
higher.
Expenses Paid
Beginning Ending During the Period*
Account Value Account Value September 1, 2005
September 1, February 28, to February 28,
2005 2006 2006
Actual
Merrill Lynch Senior Floating Rate Fund II, Inc. $1,000 $1,026.20 $7.79
Hypothetical (5% annual return before expenses)**
Merrill Lynch Senior Floating Rate Fund II, Inc. $1,000 $1,017.11 $7.75
* Expenses are equal to the annualized expense ratio of 1.55%, multiplied by the average account
value over the period, multiplied by 181/365 (to reflect the one-half year period shown).
Because the Fund is a feeder fund, the expense table reflects the expenses of both the feeder
fund and the master fund in which it invests.
** Hypothetical 5% annual return before expenses is calculated by pro-rating the number of days in
the most recent fiscal half year divided by 365.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Statement of Assets and Liabilities Merrill Lynch Senior Floating Rate Fund II, Inc.
As of February 28, 2006
Assets
Investment in Master Senior Floating Rate Trust (the "Trust"), at value
(identified cost--$343,317,702) $ 342,026,081
Prepaid expenses 109,740
---------------
Total assets 342,135,821
---------------
Liabilities
Payables:
Dividends to shareholders $ 363,580
Administrator 85,609
Other affiliates 45,211 494,400
---------------
Accrued expenses 3,696
---------------
Total liabilities 498,096
---------------
Net Assets
Net assets $ 341,637,725
===============
Net Assets Consist of
Common Stock, par value $.10 per share; 1,000,000,000 shares authorized $ 3,490,958
Paid-in capital in excess of par 367,103,317
Undistributed investment income--net $ 109,348
Accumulated realized capital losses allocated from the Trust--net (27,774,277)
Unrealized depreciation allocated from the Trust--net (1,291,621)
---------------
Total accumulated losses--net (28,956,550)
---------------
Net Assets--Equivalent to $9.79 per share based on 34,909,580 shares of capital stock
outstanding $ 341,637,725
===============
See Notes to Financial Statements.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Statement of Operations Merrill Lynch Senior Floating Rate Fund II, Inc.
For the Six Months Ended February 28, 2006
Investment Income
Net investment income allocated from the Trust:
Interest $ 11,337,384
Facility and other fees 95,303
Dividends 13,945
Expenses (1,720,347)
---------------
Total income 9,726,285
---------------
Expenses
Administration fees $ 676,281
Transfer agent fees 92,518
Tender offer fees 60,412
Printing and shareholder reports 24,899
Registration fees 17,193
Professional fees 15,518
Other 6,975
---------------
Total expenses 893,796
---------------
Investment income--net 8,832,489
---------------
Realized & Unrealized Gain (Loss) Allocated from the Trust--Net
Realized loss on investments--net (425,531)
Change in unrealized depreciation on investments and unfunded corporate loans--net 158,239
---------------
Total realized and unrealized loss--net (267,292)
---------------
Net Increase in Net Assets Resulting from Operations $ 8,565,197
===============
See Notes to Financial Statements.
Statements of Changes in Net Assets Merrill Lynch Senior Floating Rate Fund II, Inc.
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 8,832,489 $ 13,299,583
Realized gain (loss)--net (425,531) 2,730,085
Change in unrealized depreciation--net 158,239 766,310
--------------- ---------------
Net increase in net assets resulting from operations 8,565,197 16,795,978
--------------- ---------------
Dividends to Shareholders
Investment income--net (8,832,483) (12,942,150)
--------------- ---------------
Net decrease in net assets resulting from dividends to shareholders (8,832,483) (12,942,150)
--------------- ---------------
Capital Share Transactions
Net increase (decrease) in net assets derived from capital share transactions (13,202,899) 55,871,750
--------------- ---------------
Net Assets
Total increase (decrease) in net assets (13,470,185) 59,725,578
Beginning of period 355,107,910 295,382,332
--------------- ---------------
End of period* $ 341,637,725 $ 355,107,910
=============== ===============
* Undistributed investment income--net $ 109,348 $ 109,342
=============== ===============
See Notes to Financial Statements.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Financial Highlights Merrill Lynch Senior Floating Rate Fund II, Inc.
For the Six
Months Ended
The following per share data and ratios have been derived February 28, For the Year Ended August 31,
from information provided in the financial statements. 2006 2005 2004 2003 2002
Per Share Operating Performance
Net asset value, beginning of period $ 9.79 $ 9.67 $ 9.13 $ 8.64 $ 9.55
---------- ---------- ---------- ---------- ----------
Investment income--net .25*** .39*** .30*** .37 .43
Realized and unrealized gain (loss)--net --++++ .11 .55 .49 (.91)
---------- ---------- ---------- ---------- ----------
Total from investment operations .25 .50 .85 .86 (.48)
---------- ---------- ---------- ---------- ----------
Less dividends from investment income--net (.25) (.38) (.31) (.37) (.43)
---------- ---------- ---------- ---------- ----------
Net asset value, end of period $ 9.79 $ 9.79 $ 9.67 $ 9.13 $ 8.64
========== ========== ========== ========== ==========
Total Investment Return**
Based on net asset value per share 2.62%+++ 5.26% 9.41% 10.28% (5.32%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets++
Expenses 1.55%* 1.54% 1.57% 1.84% 1.78%
========== ========== ========== ========== ==========
Investment income--net 5.22%* 4.03% 3.20% 4.28% 4.64%
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 341,638 $ 355,108 $ 295,382 $ 143,155 $ 182,026
========== ========== ========== ========== ==========
Portfolio turnover of the Trust 22.90% 52.92% 76.45% 56.56% 36.77%
========== ========== ========== ========== ==========
* Annualized.
** Total investment returns exclude the early withdrawal charge, if any. The Fund is a continuously
offered closed-end fund, the shares of which are offered at net asset value. No secondary market
for the Fund's shares exists.
*** Based on average shares outstanding.
++ Includes the Fund's share of the Trust's allocated expenses, and/or investment income--net.
++++ Amount is less than $(.01) per share.
+++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Notes to Financial Statements
Merrill Lynch Senior Floating Rate Fund II, Inc.
1. Significant Accounting Policies:
Merrill Lynch Senior Floating Rate Fund II, Inc. (the "Fund") is registered
under the Investment Company Act of 1940, as amended, as a continuously
offered, non-diversified, closed-end management investment company. The Fund
seeks to achieve its investment objective by investing all of its assets in
the Master Senior Floating Rate Trust (the "Trust"), which has the same
investment objective and strategies as the Fund. The value of the Fund's
investment in the Trust reflects the Fund's proportionate interest in the net
assets of the Trust. The performance of the Fund is directly affected by the
performance of the Trust. The financial statements of the Trust, including the
Schedule of Investments, are included elsewhere in this report and should be
read in conjunction with the Fund's financial statements. The Fund's financial
statements are prepared in conformity with U.S. generally accepted accounting
principles, which may require the use of management accruals and estimates.
Actual results may differ from these estimates. These unaudited financial
statements reflect all adjustments, which are, in the opinion of management,
necessary to present a fair statement of the results for the interim period.
All such adjustments are of a normal, recurring nature. The percentage of the
Trust owned by the Fund at February 28, 2006 was 34.9%. The following is a
summary of significant accounting policies followed by the Fund.
(a) Valuation of investments--The Fund records its investment in the Trust at
fair value. Valuation of securities held by the Trust is discussed in Note
1(b) of the Trust's Notes to Financial Statements, which are included
elsewhere in this report.
(b) Investment income and expenses--The Fund records daily its proportionate
share of the Trust's income, expenses and realized and unrealized gains and
losses. In addition, the Fund accrues its own expenses.
(c) Income taxes--It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to shareholders. Therefore,
no federal income tax provision is required.
(d) Prepaid registration fees--Prepaid registration fees are charged to
expense as the related shares are issued.
(e) Dividends and distributions--Dividends from net investment income are
declared daily and paid monthly. Distributions of capital gains are recorded
on the ex-dividend dates.
(f) Investment transactions--Investment transactions in the Trust are
accounted for on a trade date basis.
2. Transactions with Affiliates:
The Fund has entered into an Administration Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services,
Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML & Co."), which is the limited partner. The Fund pays a monthly fee
at an annual rate of .40% of the Fund's average daily net assets for the
performance of administrative services (other than investment advice and
related portfolio activities) necessary for the operation of the Fund.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of ML & Co.,
is the Fund's transfer agent.
For the six months ended February 28, 2006, FAM Distributors, Inc. ("FAMD"), a
wholly-owned subsidiary of Merrill Lynch Group, Inc., earned early withdrawal
charges of $7,594 relating to the tender of the Fund's shares.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, FAMD, FDS, and/or ML & Co.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
merge ML & Co.'s investment management business, including FAM, with the
investment management business of BlackRock, Inc. This transaction is expected
to close in the third quarter of 2006.
3. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Six Months Ended Dollar
February 28, 2006 Shares Amount
Shares sold 2,240,420 $ 21,885,839
Shares issued to shareholders in
reinvestment of dividends 516,299 5,041,061
--------------- ---------------
Total issued 2,756,719 26,926,900
Shares redeemed (4,105,255) (40,129,799)
--------------- ---------------
Net decrease (1,348,536) $ (13,202,899)
=============== ===============
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Notes to Financial Statements (concluded)
Merrill Lynch Senior Floating Rate Fund II, Inc.
For the Year Ended Dollar
August 31, 2005 Shares Amount
Shares sold 9,755,947 $ 95,204,349
Shares issued to shareholders in
reinvestment of dividends 774,091 7,553,236
--------------- ---------------
Total issued 10,530,038 102,757,585
Shares redeemed (4,808,075) (46,885,835)
--------------- ---------------
Net increase 5,721,963 $ 55,871,750
=============== ===============
4. Capital Loss Carryforward:
On August 31, 2005, the Fund had a net capital loss carryforward of
$27,348,746, of which $2,381,939 expires in 2009, $864,375 expires in 2010,
$17,719,049 expires in 2011 and $6,383,383 expires in 2012. This amount will
be available to offset like amounts of any future taxable gains.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Portfolio Information Master Senior Floating Rate Trust
As of February 28, 2006
Percent of
Ten Largest Holdings Net Assets
Adelphia Communications Corp. 5.0%
Charter Communications Operating LLC 4.3
Olympus Cable Holdings LLC 2.4
Metro-Goldwyn-Mayer Studios, Inc. 2.1
Wellman, Inc.* 2.0
Frontiervision Operating Partners LP* 2.0
Huntsman ICI Holdings 1.8
PanAmSat Corp. 1.7
LifePoint Hospitals, Inc. 1.4
Allied Waste North America, Inc.* 1.3
* Includes combined holdings and/or affiliates, where applicable.
Percent of
Five Largest Industries Net Assets
Cable--U.S. 19.6%
Chemicals 9.2
Health Care 4.9
Utility 4.9
Diversified Media 4.4
For Trust compliance purposes, the Trust's industry classifications
refer to any one or more of the industry sub-classifications used
by one or more widely recognized market indexes or ratings group
indexes, and/or as defined by Trust management. The definition may
not apply for purposes of this report, which may combine industry
sub-classifications for reporting ease.
Percent of
Quality Ratings by Total
S&P/Moody's Investments
BBB/Baa 0.5%
BB/Ba 30.4
B/B 43.2
CCC/Caa 6.6
NR (Not Rated) 5.9
Other* 13.4
* Includes portfolio holdings in common stocks, warrants, other
interests and short-term investments.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Schedule of Investments Master Senior Floating Rate Trust
Face Senior Secured
Amount Floating Rate Loan Interests* Value
Aerospace & Defense--1.8%
K&F Industries, Inc. Term Loan:
$ 3,587,416 6.86% due 11/18/2012 $ 3,635,624
1,868,446 6.87% due 11/18/2013 1,893,554
4,250,509 Standard Aero Holdings Term Loan,
6.83% - 6.96% due 8/24/2012 4,225,273
Vought Aircraft Industries, Inc.:
6,240,706 Term Loan, 7.11% due 12/22/2011 6,319,688
1,200,000 Tranche B Line of Credit Deposit, 6.89%
due 12/22/2010 1,213,350
---------------
17,287,489
Airlines--0.5%
1,250,000 Delta Air Lines, Inc. Term Loan B,11.01%
due 3/27/2008 1,299,687
3,281,250 United Air Lines Term Loan B, 8.625%
due 2/01/2012 3,341,953
---------------
4,641,640
Automotive--1.7%
4,672,366 Metaldyne Corp. Term Loan D, 9.044%
due 12/31/2009 4,762,893
670,000 Metaldyne Term Loan D, 11.25%
due 12/31/2009 679,003
TRW Automotive, Inc.:
4,207,500 Tranche B Term Loan, 6.25% due 6/30/2012 4,219,479
3,465,000 Tranche E Term Loan, 6% due 11/02/2010 3,484,924
Tenneco Automotive, Inc.:
2,721,197 Term Loan B, 5.943% - 7.02%
due 12/12/2010 2,763,716
1,186,440 Tranche B-1 Credit Linked Deposit, 6.82%
due 12/12/2010 1,204,978
---------------
17,114,993
Broadcasting--3.4%
3,951,180 Emmis Operating Co. Term Loan B, 6.32%
due 11/10/2011 3,981,122
4,987,500 Entravision Communications Term Loan B, 6.03%
due 3/29/2013 5,026,467
NextMedia Group, Inc.:
1,534,615 Delay Draw Term Loan, 6.57%
due 11/15/2012 1,548,043
3,452,885 First Lien Term Loan, 6.57%
due 11/15/2012 3,483,097
3,250,000 Second Lien Term Loan, 9.07%
due 11/15/2013 3,312,293
11,750,000 Paxson Communications Corp. First Lien Term
Loan, 7.777% due 11/15/2012 11,786,719
3,970,000 Susquehanna Media Term Loan C, 6.07%
due 3/30/2012 3,977,444
---------------
33,115,185
Cable--U.S.--19.5%
50,000,000 Adelphia Communications Corp. Term Loan B,
9.50% due 6/30/2009 49,145,850
41,318,631 Charter Communications Operating LLC Tranche B
Term Loan, 7.86% - 7.92% due 4/07/2011 41,841,187
6,333,333 DIRECTV Holdings, Inc. Tranche B Term Loan,
6.039% - 6.07% due 4/13/2013 6,413,488
Frontiervision Operating Partners LP:
3,582,057 Term Loan A, 8.90% due 3/31/2006 3,592,803
15,668,000 Term Loan B, 8.775% due 3/31/2006 15,738,992
Face Senior Secured
Amount Floating Rate Loan Interests* Value
Cable--U.S. (concluded)
$ 9,975,000 Hilton Head Communications UCA Term Loan B,
8.75% due 3/31/2008 $ 9,720,428
11,294,810 Insight Midwest Holdings LLC Term Loan C,
6.563% due 12/31/2009 11,465,520
1,123,078 Intelsat Ltd. Term Loan, 6.313% due 7/28/2011 1,136,064
5,500,000 Mediacom Broadband Group Tranche A Term
Loan, 5.79% - 6.29% due 3/31/2010 5,501,964
3,168,000 Mediacom Communications LLC Tranche B Term
Loan, 6.18% - 7% due 3/31/2013 3,215,520
23,500,000 Olympus Cable Holdings LLC Term Loan B,
9.50% due 9/30/2010 23,149,592
16,787,500 PanAmSat Corp. Tranche B Term Loan, 6.438%
due 8/20/2011 17,013,090
1,970,000 Persona Cable Term Loan B, 7.527%
due 3/31/2011 1,994,625
669,712 Persona Communications Term Loan C, 9.50%
due 7/30/2011 678,083
---------------
190,607,206
Chemicals--8.6%
9,651,500 C2 Carbon/Cll Term Loan B, 6.563%
due 8/23/2012 9,766,112
7,182,700 Cedar Chemical Corp. Term Loan B, 8.90%
due 10/31/2003 (d)(g) 395,048
4,018,511 Celanese Holdings LLC Term Loan B, 6.527%
due 4/06/2011 4,070,751
10,000,000 Cognis Deutschland Second Lien Term Loan B,
9.308% due 11/15/2013 10,251,040
17,245,785 Huntsman ICI Holdings Term Loan B, 6.32%
due 8/16/2012 17,367,040
2,483,951 Invista Canada Term Loan, 6.375%
due 4/29/2011 2,502,581
5,578,448 Invista SARL, 6.375% due 4/29/2011 5,649,339
1,477,500 Lyondell-Citgo Refining Term Loan, 6.527%
due 5/21/2007 1,492,275
1,985,000 Mosaic Co. Tranche B Term Loan,
5.563% - 6.25% due 2/21/2012 2,006,587
5,160,610 Nalco Co. Tranche B Term Loan, 6.25% - 6.48%
due 11/04/2010 5,219,023
2,000,000 Polymer Group, Inc. Term Loan B, 6.769%
due 11/22/2012 2,025,312
3,960,000 Rockwood Specialties Group, Inc. Tranche D Term
Loan, 6.466% due 12/10/2012 4,015,689
Wellman, Inc.:
9,000,000 First Lien Term Loan, 8.68% due 2/10/2009 9,157,500
10,000,000 Second Lien Term Loan,11% due 2/10/2010 10,262,500
---------------
84,180,797
Consumer--Non-Durables--1.0%
2,376,442 American Achievement Corp. Term Loan B,
6.92% due 3/22/2011 2,418,030
2,268,000 Camelbak Products LLC First Lien Term Loan,
8.17% due 8/04/2011 2,197,125
4,692,529 Josten's, Inc. Term Loan B, 6.777%
due 10/04/2011 4,744,902
---------------
9,360,057
Diversified Media--4.4%
5,460,202 Dex Media West, Inc. Term Loan B,
6.11% - 6.56% due 3/09/2010 5,516,513
3,920,375 Liberty Group Operating Term Loan B,
6.625% - 6.875% due 2/28/2012 3,958,846
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Schedule of Investments (continued) Master Senior Floating Rate Trust
Face Senior Secured
Amount Floating Rate Loan Interests* Value
Diversified Media (concluded)
$ 4,000,000 MGM Holdings II, Inc. Tranche B Term Loan,
6.78% due 4/08/2012 $ 4,051,592
3,000,000 Merrill Corp. Term Loan, 6.855% - 7.105%
due 5/15/2011 3,034,218
20,000,000 Metro-Goldwyn-Mayer Studios, Inc. Term Loan B,
6.78% due 4/30/2011 20,257,960
2,162,349 RH Donnelley Tranche D Term Loan,
6.20% - 6.31% due 8/30/2011 2,182,206
3,121,514 Six Flags Theme Parks, Inc. Term Loan B,
7.05% - 7.21% due 6/30/2009 3,162,727
942,857 Yankee Holdings LP Term Loan, 7.03%
due 5/01/2007 947,571
---------------
43,111,633
Energy--Exploration & Production--0.4%
1,492,500 Carrizo Oil & Gas, Inc. Second Lien Term Loan,
10.527% due 7/21/2010 1,535,409
1,950,200 Williams Production RMT Co. Term Loan, 6.82%
due 5/31/2007 1,973,969
---------------
3,509,378
Energy--Other--1.0%
818,815 Dresser, Inc. Term Loan C, 7.11% due 4/10/2009 833,144
3,000,000 Key Energy Services, Inc. Term Loan B,
7.52% - 7.78% due 6/30/2012 3,046,875
2,500,000 Markwest Energy Operating Co. LLC Term Loan B,
6.82% due 12/29/2010 2,531,250
3,000,000 Scorpion Drilling Ltd. Second Lien Term Loan,
12.07% due 5/05/2015 3,097,500
---------------
9,508,769
Financial--0.7%
7,000,000 LPL Financial Services, Inc. Term Loan B,
7.769% - 8.13% due 8/28/2013 7,039,375
Food & Drug--0.2%
2,300,000 The Pantry, Inc. Term Loan B, 6.39%
due 1/02/2012 2,327,313
Food & Tobacco--2.1%
2,967,500 Commonwealth Brands Term Loan, 7%
due 12/22/2012 3,006,448
1,488,750 Del Monte Term Loan B, 6.14% due 2/08/2012 1,510,709
4,376,531 Doane Pet Care Co. Tranche B Term Loan,
6.621% - 6.94% due 10/24/2012 4,442,179
2,777,322 Domino's, Inc. Term Loan, 6.063%
due 6/25/2010 2,807,989
5,246,687 Dr. Pepper/Seven Up Bottling Group, Inc. Term
Loan B, 6.57% due 12/19/2010 5,325,387
3,304,951 Merisant Co. Term Loan B, 7.918%
due 1/11/2010 3,065,342
---------------
20,158,054
Gaming--4.4%
4,770,000 Ameristar Casinos Term Loan B, 6.191%
due 9/09/2012 4,820,681
3,940,000 Boyd Gaming Corp. Term Loan, 5.70% - 6.027%
due 6/30/2011 3,987,607
1,459,573 Global Cash Access LLC Term Loan B, 6.855%
due 3/10/2010 1,479,642
2,992,484 MotorCity Casino Term Loan B, 6.85%
due 7/21/2012 3,020,539
6,483,750 Penn National Gaming, Inc. Term Loan B, 5.89%
due 9/01/2007 6,578,983
Face Senior Secured
Amount Floating Rate Loan Interests* Value
Gaming (concluded)
$ 5,000,000 Pinnacle Entertainment Term Loan, 6.57%
due 11/25/2010 $ 5,088,125
2,487,500 Trump Entertainment Resorts Holdings LP Term
Loan B-1, 7.17% due 5/01/2012 2,518,594
Venetian Casino Resort LLC:
3,982,906 Delay Draw Term Loan, 6.28% due 6/15/2011 4,026,156
11,517,094 Term Loan B, 6.28% due 6/15/2011 11,642,158
---------------
43,162,485
Health Care--4.9%
1,975,000 Community Health Systems, Inc. Term Loan,
6.36% - 6.56% due 8/19/2011 2,002,156
7,401,059 DaVita Inc. Tranche B Term Loan, 6.35% - 7.05%
due 10/05/2012 7,518,240
1,824,620 Duloxetine Royalty Term Loan, 9.10%
due 10/18/2013 1,833,743
HealthSouth Corp.:
3,526,031 Term Loan, 7.11% due 3/08/2010 3,542,561
956,250 Tranche B Term Loan, 6.89% due 3/08/2010 960,733
1,311,915 Kinetic Concepts, Inc. Term Loan B, 6.28%
due 8/11/2010 1,327,767
13,669,368 LifePoint Hospitals, Inc. Term Loan B, 6.185%
due 4/15/2012 13,767,145
Matria Healthcare, Inc.:
641,026 Bridge Loan, 7.02% due 1/19/2007 643,029
1,358,974 Term Loan B, 6.82% - 7.02% due 1/19/2012 1,374,263
Medical Specialties Group (d)(g):
4,352,856 Term Loan, 8.125% due 9/03/2003 65,293
12,655,527 Term Loan Axel, 8% due 6/30/2004 189,833
3,697,015 Medpointe Healthcare Inc. Tranche B Term Loan,
9.86% due 9/30/2008 3,697,015
804,545 Orthofix International NV Term Loan B, 6.60%
due 12/15/2008 809,071
423,512 Rotech Healthcare, Inc. Term Loan B, 7.53%
due 3/31/2008 426,689
9,910,163 Vanguard Health Systems Term Loan B, 6.95%
due 9/23/2011 10,047,973
---------------
48,205,511
Housing--3.2%
10,000,000 Capital Automotive Term Loan B, 6.34%
due 12/16/2010 10,059,380
2,891,339 Goodman Global Holdings Term Loan, 6.375%
due 12/23/2011 2,915,736
4,380,317 Headwaters, Inc. Term Loan B-1, 6.86%
due 4/30/2011 4,416,818
4,275,526 LIONS Gables Realty Term Loan B, 6.32%
due 9/30/2006 4,303,014
4,789,584 Lake at Las Vegas Joint Venture First Lien Term
Loan, 7.318% - 7.46% due 11/01/2009 4,803,268
4,925,000 Nortek, Inc. Term Loan, 6.94% - 8.75%
due 8/27/2011 4,971,172
---------------
31,469,388
Information Technology--2.1%
7,480,000 Fidelity National Information Solutions, Inc. Term
Loan B, 6.32% due 3/09/2013 7,541,650
3,980,000 SunGard Data Systems, Inc. Term Loan B,
7.215% due 2/11/2013 4,041,654
8,925,970 Telcordia Technologies, Inc. Term Loan,
7.22% - 7.31% due 9/15/2012 8,842,289
---------------
20,425,593
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Schedule of Investments (continued) Master Senior Floating Rate Trust
Face Senior Secured
Amount Floating Rate Loan Interests* Value
Leisure--0.3%
$ 3,297,129 True Temper Sports, Inc. Term Loan B,
6.53% - 7.53% due 3/15/2011 $ 3,317,736
Manufacturing--3.1%
Amsted Industries, Inc. Term Loan B-1:
441,905 6.885% - 7.028% due 10/15/2010 448,718
3,454,490 6.885% - 7.13% due 10/15/2010 3,507,748
1,492,503 Brand Services, Inc. Tranche 3 Term Loan B,
7.02% - 7.32% due 1/15/2012 1,515,201
Channel Master Holdings, Inc. (d)(g):
128,199 Revolving Credit, 8.313% due 11/15/2004 10,897
2,065,112 Term Loan, 9% due 11/15/2004 175,535
3,295,699 GenTek, Inc. First Lien Term Loan, 6.76% - 7.50%
due 2/28/2011 3,324,022
Invensys International Holdings Ltd.:
2,241,036 First Lien Term Loan, 7.791% due 9/04/2009 2,274,652
2,000,000 Second Lien Term Loan, 9.431%
due 12/04/2009 2,045,000
243,243 Itron, Inc. Tranche C Term Loan, 6.375% - 8.25%
due 12/17/2010 244,764
1,491,334 JohnsonDiversey Inc. Delayed Draw Term Loan,
7.13% - 7.19% due 12/15/2011 1,509,043
11,970,000 Mueller Group LLC Term Loan B,
6.466% - 6.918% due 10/03/2012 12,131,380
3,061,984 Trimas Corp. Term Loan B, 8.375%
due 12/31/2009 3,095,154
---------------
30,282,114
Packaging--2.3%
1,469,333 BWAY Corp. Term Loan B, 6.813% due 6/30/2011 1,490,226
3,909,004 Berry Plastics Corp. Tranche 2 Term Loan B,
6.447% due 12/02/2011 3,967,233
10,917,500 Graham Packaging Co. LP Term Loan B,
6.563% - 6.938% due 10/07/2011 11,074,439
Owens-Illinois Group, Inc.:
730,099 Term Loan A, 6.36% due 4/01/2007 733,445
394,214 Term Loan B, 6.35% due 4/01/2008 396,740
4,712,914 Tranche Term Loan C, 6.39% due 4/01/2008 4,743,845
---------------
22,405,928
Paper--2.3%
4,433,077 Boise Cascade Holdings LLC Tranche D Term Loan,
6.281% - 6.375% due 10/28/2011 4,495,291
3,000,000 Georgia Pacific Corp. First Lien Term Loan B,
6.88% due 2/14/2013 3,026,757
3,277,343 Graphic Packaging International, Inc. Term Loan B,
6.716% - 7.19% due 8/08/2010 3,333,818
SP Newsprint Co. Tranche B-1:
3,182,818 Credit Linked Deposit, 4.379% due 1/09/2010 3,230,560
1,230,598 Term Loan, 6.82% - 6.86% due 1/09/2010 1,249,057
Smurfit Stone Container Corp.:
2,008,590 Deposit Account, 4.57% due 11/01/2010 2,036,083
3,084,020 Term Loan C, 5.875% - 6.875%
due 11/01/2011 3,127,581
2,346,702 Term Loan C, 6.75% - 6.875%
due 11/01/2011 2,379,849
---------------
22,878,996
Retail--2.0%
1,670,000 Advance Stores Co., Inc. Delay Draw Term Loan,
6.063% - 6.188% due 9/30/2010 1,686,700
1,740,861 American Reprographics Co. Term Loan,
6.32% - 8.25% due 6/18/2009 1,760,446
Face Senior Secured
Amount Floating Rate Loan Interests* Value
Retail (concluded)
$ 4,906,184 Dollarama Group Term Loan B,
6.493% - 6.918% due 11/18/2011 $ 4,961,379
3,694,639 General Nutrition Centers, Inc. Tranche B Term
Loan, 7.61% - 7.80% due 12/05/2009 3,746,596
6,882,911 The Neiman Marcus Group, Inc. Term Loan,
6.947% due 4/06/2013 6,990,457
---------------
19,145,578
Service--4.2%
2,124,000 Alliance Laundry Systems LLC Term Loan, 6.73%
due 1/27/2012 2,154,532
Allied Waste North America, Inc.:
9,131,529 Term Loan, 6.09% - 6.97% due 1/15/2012 9,236,635
3,545,270 Tranche A Credit Linked Deposit, 6.39%
due 1/15/2012 3,588,480
5,880,450 Buhrmann USA, Inc. Term Loan C,
6.238% - 6.44% due 12/23/2010 5,963,147
5,000,000 Clarke American Term Loan B, 7.75% - 7.92%
due 12/15/2011 5,068,750
5,736,387 Great Lakes Dredge & Dock Corp. Tranche B
Term Loan, 7.40% - 8.24% due 12/23/2010 5,818,848
7,682,418 Prime Succession, Inc. Term Loan, 5.75%
due 8/01/2003 (d)(g) 0
3,000,000 RGIS Inventory Specialists First Lien Term Loan,
7.12% due 12/31/2012 3,020,625
4,117,500 U.S. Investigations Service, 7.00% - 7.04%
due 10/14/2012 4,156,102
United Rentals, Inc.:
1,620,263 Term Loan, 6.86% due 2/14/2011 1,641,192
329,825 Tranche B Credit Linked Deposit, 4.57%
due 2/14/2011 334,085
---------------
40,982,396
Steel--0.0%
10,162,693 Acme Metals, Inc. Term Loan, 11.75%
due 12/01/2005 (d)(g) 0
Telecommunications--1.3%
2,000,000 Alaska Communications Systems Holdings, Inc.
Term Loan, 6.527% due 2/01/2012 2,019,000
7,998,750 Consolidated Communications, Inc. Term Loan D,
6.28% - 6.52% due 10/14/2011 8,090,400
3,000,000 Time Warner Telecom Term Loan B, 7.11%
due 11/30/2010 3,053,751
---------------
13,163,151
Transportation--0.4%
4,268,374 Sirva Worldwide Tranche B Term Loan,
8.55% - 8.57% due 12/01/2010 4,122,536
Utility--4.9%
2,000,000 AES Corp. Term Loan, 5.69% - 6.75%
due 4/30/2008 2,026,000
4,586,785 Cogentrix Delaware Holdings, Inc. Term Loan,
6.28% due 4/15/2012 4,638,863
Covanta Energy Corp.:
3,980,488 First Lien Letter of Credit, 3.36%
due 6/24/2012 4,050,146
2,684,634 First Lien Term Loan, 7.581% due 6/24/2012 2,731,615
4,100,000 Second Lien Term Loan, 10.019% - 10.081%
due 6/24/2013 4,176,875
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Schedule of Investments (continued) Master Senior Floating Rate Trust
Face Senior Secured
Amount Floating Rate Loan Interests* Value
Utility (concluded)
El Paso Corp.:
$ 3,937,500 Deposit Account, 4.29% due 11/23/2009 $ 3,979,608
6,431,250 Term Loan, 7.313% due 11/23/2009 6,513,872
9,925,000 KGen LLC Tranche A Term Loan, 7.152%
due 8/05/2011 9,925,000
997,500 LSP Kendall Energy Term Loan B, 6.527%
due 10/07/2013 999,578
La Paloma:
123,857 Delay Draw Term Loan, 6.277%
due 8/16/2012 125,204
262,295 Letter of Credit, 6.331% due 8/16/2012 265,148
2,000,000 Second Lien Term Loan, 8.027%
due 8/16/2013 2,032,500
1,555,149 Term Loan, 6.277% due 8/16/2012 1,508,494
2,750,000 Metcalf Energy Center LLC Tranche 1 Term Loan,
7.81% due 5/20/2010 2,777,500
2,493,745 Reliant Energy, Inc. Term Loan, 6.089%
due 4/30/2010 2,491,211
---------------
48,241,614
Wireless Communications--0.9%
3,941,667 Centennial Cellular Operating Co. Term Loan,
6.27% - 6.45% due 2/09/2011 3,999,688
4,500,000 Nextel Partners, Inc. Term Loan D, 5.91%
due 5/31/2012 4,514,999
---------------
8,514,687
Total Senior Secured Floating Rate Loan
Interests (Cost--$827,199,753)--81.6% 798,279,602
Corporate Bonds
Broadcasting--0.0%
145,714 Emmis Communications Corp.,10.366%
due 6/15/2012 (a) 145,714
250,000 XM Satellite Radio, Inc., 10.18%
due 5/01/2009 (a) 253,438
---------------
399,152
Cable--U.S.--0.1%
500,000 Intelsat Bermuda Ltd., 9.609%
due 1/15/2012 (a)(b) 510,000
Chemicals--0.6%
5,992,000 GEO Specialty Chemicals, Inc.,13.036%
due 12/31/2009 (h) 5,153,120
1,102,853 PCI Chemicals Canada, Inc.,10%
due 12/31/2008 1,155,239
---------------
6,308,359
Diversified Media--0.0%
250,000 Universal City Florida Holding Co. I, 9.43%
due 5/01/2010 (a) 253,750
Information Technology--0.4%
3,850,000 Sungard Data Systems, Inc., 9.431%
due 8/15/2013 (a)(b) 4,061,750
Leisure--1.0%
9,200,000 FelCor Lodging LP, 8.83% due 6/01/2011 (a) 9,568,000
Paper--0.1%
250,000 Boise Cascade LLC, 7.475% due 10/15/2012 (a) 248,750
650,000 NewPage Corp.,10.93% due 5/01/2012 (a) 682,500
---------------
931,250
Face
Amount Corporate Bonds Value
Telecommunications--1.8%
$ 9,500,000 Qwest Communications International, Inc.,
8.249% due 2/15/2009 (a) $ 9,701,875
275,000 Qwest Corp., 7.741% due 6/15/2013 (a) 300,438
7,000,000 Time Warner Telecom Holdings, Inc., 8.749%
due 2/15/2011 (a) 7,148,750
---------------
17,151,063
Wireless Communications--0.0%
250,000 Rogers Wireless Communications, Inc.,
7.616% due 12/15/2010 (a) 258,750
Total Corporate Bonds
(Cost--$41,716,041)--4.0% 39,442,074
Shares
Held Common Stocks
Chemicals--0.0%
39,151 GEO Specialty Chemicals, Inc. (g) 176,181
Steel--0.0%
51,714 Acme Package Corp. Senior Holdings (g)(i) 0
Total Common Stocks
(Cost--$0)--0.0% 176,181
Warrants (c)
Paper--0.0%
57 Cellu Tissue Holdings, Inc. Series A
(expires 9/28/2011) 0
Utility--0.0%
9,115 Reliant Resources (expires 10/25/2008) 55,829
Total Warrants
(Cost--$1)--0.0% 55,829
Beneficial
Interest Other Interests (e)
Health Care--0.0%
$ 14,398 MEDIQ Inc. (Preferred Stock Escrow) 0
Total Other Interests
(Cost--$0)--0.0% 0
Short-Term Securities
$129,287,906 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I, 4.42% (a)(f) 129,287,906
Total Short-Term Securities
(Cost--$129,287,906)--13.2% 129,287,906
Total Investments (Cost--$998,203,701**)--98.8% 967,241,592
Other Assets Less Liabilities--1.2% 11,544,618
---------------
Net Assets--100.0% $ 978,786,210
===============
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Schedule of Investments (concluded) Master Senior Floating Rate Trust
* Senior Secured Floating Rate Loan Interests in which the Trust invests
generally pay interest at rates that are periodically redetermined by
reference to a base lending rate plus a premium. These base lending rates
are generally (i) the lending rate offered by one or more major European
banks, such as LIBOR (London InterBank Offered Rate), (ii) the prime rate
offered by one or more major U.S. banks or (iii) the certificate of
deposit rate.
** The cost and unrealized appreciation (depreciation) of investments,
as of February 28, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 998,339,823
================
Gross unrealized appreciation $ 9,233,188
Gross unrealized depreciation (40,331,419)
----------------
Net unrealized depreciation $ (31,098,231)
================
(a) Floating rate security.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(c) Warrants entitle the Trust to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number
of shares are subject to adjustment under certain conditions until the
expiration date.
(d) As a result of bankruptcy proceedings, the issuer did not repay the
principal amount of the security upon maturity.
(e) Other interests represent beneficial interest in liquidation trusts and
other reorganization entities and are non-income producing.
(f) Investments in companies considered to be an affiliate of the Trust,
for purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I, 4.42% $(415,850) $1,739,613
(g) Non-income producing security.
(h) Convertible security.
(i) Restricted security as to resale, representing 0.0% of net assets,
was as follows:
Acquisition
Issue Date Cost Value
Acme Package Corp. Senior Holdings 11/25/2002 $ -- $ 0
o For Trust compliance purposes, the Trust's industry classifications
refer to any one or more of the industry sub-classifications used
by one or more widely recognized market indexes or ratings group
indexes, and/or as defined by Trust management. This definition may
not apply for purposes of this report, which may combine industry
sub-classifications for reporting ease. Industries shown are as a
percent of net assets.
See Notes to Financial Statements.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Statement of Assets and Liabilities Master Senior Floating Rate Trust
As of February 28, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$868,915,795) $ 837,953,686
Investments in affiliated securities, at value (identified cost--$129,287,906) 129,287,906
Cash 7,830,787
Receivables:
Interest $ 6,535,461
Contributions 766,876
Securities sold 536,250
Commitment fees 14,048 7,852,635
---------------
Prepaid expenses 3,544
---------------
Total assets 982,928,558
---------------
Liabilities
Unfunded loan commitment 437,225
Payables:
Securities purchased 3,000,000
Investment adviser 584,284
Other affiliates 14,787 3,599,071
---------------
Accrued expenses and other liabilities 106,052
---------------
Total liabilities 4,142,348
---------------
Net Assets
Net assets $ 978,786,210
===============
Net Assets Consist of
Investors' capital $ 1,010,113,396
Unrealized depreciation--net (31,327,186)
---------------
Net Assets $ 978,786,210
===============
See Notes to Financial Statements.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Statement of Operations Master Senior Floating Rate Trust
For the Six Months Ended February 28, 2006
Investment Income
Interest (including $1,739,613 from affiliates) $ 32,737,260
Facility and other fees 275,577
Dividends 41,371
---------------
Total income 33,054,208
---------------
Expenses
Investment advisory fees $ 4,646,370
Accounting services 171,463
Professional fees 82,475
Custodian fees 24,180
Trustees' fees and expenses 19,416
Pricing fees 6,466
Printing and shareholder reports 1,068
Other 17,177
---------------
Total expenses 4,968,615
---------------
Investment income--net 28,085,593
---------------
Realized & Unrealized Gain (Loss)--Net
Realized loss on investments--net (1,221,676)
Change in unrealized depreciation on:
Investments--net 410,915
Unfunded corporate loans--net (4,753) 406,162
--------------- ---------------
Total realized and unrealized loss--net (815,514)
---------------
Net Increase in Net Assets Resulting from Operations $ 27,270,079
===============
See Notes to Financial Statements.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Statements of Changes in Net Assets Master Senior Floating Rate Trust
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 28,085,593 $ 46,965,092
Realized gain (loss)--net (1,221,676) 1,613,248
Change in unrealized depreciation--net 406,162 10,177,092
--------------- ---------------
Net increase in net assets resulting from operations 27,270,079 58,755,432
--------------- ---------------
Capital Transactions
Proceeds from contributions 34,749,187 132,214,555
Fair value of withdrawals (116,052,183) (211,031,968)
--------------- ---------------
Net decrease in net assets derived from capital transactions (81,302,996) (78,817,413)
--------------- ---------------
Net Assets
Total decrease in net assets (54,032,917) (20,061,981)
Beginning of period 1,032,819,127 1,052,881,108
--------------- ---------------
End of period $ 978,786,210 $ 1,032,819,127
=============== ===============
See Notes to Financial Statements.
Financial Highlights Master Senior Floating Rate Trust
For the Six
Months Ended
The following ratios have been derived from February 28, For the Year Ended August 31,
information provided in the financial statements. 2006 2005 2004 2003 2002
Total Investment Return
Total investment return 2.78%++ 5.78% 10.15% 11.07% (4.66%)
========== ========== ========== ========== ==========
Ratios to Average Net Assets
Expenses, excluding interest expense 1.02%* 1.01% 1.02% 1.04% 1.09%
========== ========== ========== ========== ==========
Expenses 1.02%* 1.01% 1.02% 1.05% 1.12%
========== ========== ========== ========== ==========
Investment income--net 5.74%* 4.52% 3.81% 4.80% 5.31%
========== ========== ========== ========== ==========
Leverage
Amount of borrowings outstanding, end of period
(in thousands) -- -- -- -- $ 13,000
========== ========== ========== ========== ==========
Average amount of borrowings outstanding during the
period (in thousands) -- -- -- $ 3,187 $ 3,959
========== ========== ========== ========== ==========
Supplemental Data
Net assets, end of period (in thousands) $ 978,786 $1,032,819 $1,052,881 $ 942,878 $ 182,205
========== ========== ========== ========== ==========
Portfolio turnover 22.90% 52.92% 76.45% 56.56% 36.77%
========== ========== ========== ========== ==========
* Annualized.
++ Aggregate total investment return.
See Notes to Financial Statements.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Notes to Financial Statements Master Senior Floating Rate Trust
1. Significant Accounting Policies:
Master Senior Floating Rate Trust (the "Trust") is registered under the
Investment Company Act of 1940, as amended, and is organized as a Delaware
statutory trust. The Declaration of Trust permits the Trustees to issue
nontransferable interests in the Trust, subject to certain limitations. The
Trust's financial statements are prepared in conformity with U.S. generally
accepted accounting principles, which may require the use of management
accruals and estimates. Actual results may differ from these estimates. These
unaudited financial statements reflect all adjustments, which are, in the
opinion of management, necessary to present a fair statement of the results
for the interim period. All such adjustments are of a normal, recurring
nature. The following is a summary of significant accounting policies followed
by the Trust.
(a) Loan participation interests--The Trust primarily invests in senior
secured floating rate loan interests ("Loan Interests") with collateral having
a market value, at the time of acquisition by the Trust, which Trust
management believes equals or exceeds the principal amount of the Loan
Interests. The Trust may invest up to 20% of its total assets in loans made on
an unsecured basis. Because agents, banks and intermediate participants from
whom the Trust purchases the loan interest are primarily financial
institutions, the Trust's investment in Loan Interests at February 28, 2006
could be considered to be concentrated in the industry group consisting of
financial institutions.
(b) Valuation of investments--Loan Interests are valued in accordance with
guidelines established by the Board of Trustees. Loan Interests are valued at
the mean between the last available bid and asked prices from one or more
brokers or dealers as obtained from Loan Pricing Corporation. For the limited
number of Loan Interests for which no reliable price quotes are available,
such Loan Interests will be valued by Loan Pricing Corporation through the use
of pricing matrixes to determine valuations. If the pricing service does not
provide a value for the Loan Interests, Fund Asset Management L.P. ("FAM")
will value the Loan Interests at fair value, which is intended to approximate
market value.
Debt securities are traded primarily in the over-the-counter markets ("OTC")
and are valued at the last available bid price in the OTC market or on the
basis of values obtained by a pricing service. Pricing services use valuation
matrixes that incorporate both dealer-supplied valuations and valuation
models. The procedures of the pricing service and its valuations are reviewed
by the officers of the Trust under the general direction of the Board of
Trustees. Such valuations and procedures will be reviewed periodically by the
Board of Trustees of the Trust.
Securities that are held by the Trust that are traded on stock exchanges or
the Nasdaq National Market are valued at the last sale price or official close
price on the exchange on which such securities are traded, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available
asked price for short positions. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Trustees of the
Trust. Long positions in securities traded in the over-the-counter ("OTC")
market, Nasdaq Small Cap or Bulletin Board are valued at the last available
bid price or yield equivalent obtained from one or more dealers or pricing
services approved by the Board of Trustees of the Trust. Short positions in
securities traded in the OTC market are valued at the last available asked
price. Portfolio securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most representative
market. When the Trust writes an option, the amount of the premium received is
recorded on the books of the Trust as an asset and an equivalent liability.
The amount of the liability is subsequently valued to reflect the current
market value of the option written, based on the last sale price in the case
of exchange-traded options or, in the case of options traded in the OTC
market, the last asked price. Options purchased by the Trust are valued at
their last sale price in the case of exchange-traded options or, in the case
of options traded in the OTC market, the last bid price. Swap agreements are
valued based upon quoted fair valuations received daily by the Trust from a
pricing service or counterparty. Other investments, including futures
contracts and related options, are stated at market value. Obligations with
remaining maturities of 60 days or less are valued at amortized cost unless
FAM believes that this method no longer produces fair valuations. Repurchase
agreements will be valued at cost plus accrued interest.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued) Master Senior Floating Rate Trust
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities, is
substantially completed each day at various times prior to the close of
business on the New York Stock Exchange ("NYSE"). The values of such
securities used in computing the net assets of the Trust are determined as of
such times. Foreign currency exchange rates also are generally determined
prior to the close of business on the NYSE. Occasionally, events affecting the
values of such securities and such exchange rates may occur between the times
at which they are determined and the close of business on the NYSE that may
not be reflected in the computation of the Trust's net assets. If events (for
example, a company announcement, market volatility or a natural disaster)
occur during such periods that are expected to materially affect the value of
such securities, those securities may be valued at their fair value as
determined in good faith by the Board of Trustees or by FAM using a pricing
service and/or procedures approved by the Board of Trustees.
(c) Derivative financial instruments--The Trust may engage in various
portfolio investment strategies both to increase the return of the Trust and
to hedge, or protect, its exposure to interest rate movements and movements in
the securities markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Swaps--The Trust may enter into swap agreements, which are over-the-counter
contracts in which the Trust and counterparty agree to make periodic net
payments on a specified notional amount. The net payments can be made for a
set period of time or may be triggered by a pre-determined credit event. The
net periodic payments may be based on a fixed or variable interest rate; the
change in market value of a specified security, basket of securities, or
index; or the return generated by a security. These periodic payments received
or made by the Trust are recorded in the accompanying Statement of Operations
as realized gains and losses, respectively. Gains or losses are also realized
upon termination of the swap agreements. Swaps are marked-to-market daily and
changes in value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments, failure of the
counterparties to perform under the contracts' terms and the possible lack of
liquidity with respect to the swap agreements.
(d) Income taxes--The Trust is classified as a partnership for federal income
tax purposes. As such, each investor in the Trust is treated as owner of its
proportionate share of the net assets, income, expenses and realized and
unrealized gains and losses of the Trust. Therefore, no federal income tax
provision is required. It is intended that the Trust's assets will be managed
so an investor in the Trust can satisfy the requirements of subchapter M of
the Internal Revenue Code.
(e) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Trust amortizes all
premiums and discounts on debt securities.
(f) Securities lending--The Trust may lend securities to financial
institutions that provide cash or securities issued or guaranteed by the U.S.
government as collateral, which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities.
The market value of the loaned securities is determined at the close of
business of the Trust and any additional required collateral is delivered to
the Trust on the next business day. Where the Trust receives securities as
collateral for the loaned securities, it receives a fee from the borrower. The
Trust typically receives the income on the loaned securities, but does not
receive the income on the collateral. Where the Trust receives cash
collateral, it may invest such collateral and retain the amount earned on such
investment, net of any amount rebated to the borrower. Loans of securities are
terminable at any time and the borrower, after notice, is required to return
borrowed securities within five business days. The Trust may pay reasonable
finder's, lending agent, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation to return
borrowed securities because of insolvency or for any other reason, the Trust
could experience delays and costs in gaining access to the collateral. The
Trust also could suffer a loss where the value of the collateral falls below
the market value of the borrowed securities, in the event of borrower default
or in the event of losses on investments made with cash collateral.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Notes to Financial Statements (concluded) Master Senior Floating Rate Trust
2. Investment Advisory Agreement and Transactions with Affiliates:
The Trust has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect,
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner.
FAM is responsible for the management of the Trust's portfolio and provides
the necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Trust. For such services, the Trust pays a
monthly fee at an annual rate of .95% of the average daily value of the
Trust's net assets.
The Trust has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, an affiliate of FAM, or its affiliates.
Pursuant to that order, the Trust also has retained Merrill Lynch Investment
Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending
agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Trust, invest cash collateral
received by the Trust for such loans, among other things, in a private
investment company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates.
For the six months ended February 28, 2006, the Trust reimbursed FAM $9,579
for certain accounting services.
Certain officers and/or trustees of the Trust are officers and/or directors of
FAM, PSI, ML & Co., and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
merge ML & Co.'s investment management business, including FAM, with the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the six months ended February 28, 2006 were $203,006,622 and
$259,917,926, respectively.
4. Unfunded Loan Interests:
As of February 28, 2006, the Trust had unfunded loan commitments of
approximately $22,816,000, which would be extended at the option of the
borrower, pursuant to the following loan agreements:
(in Thousands)
Unfunded
Borrower Commitment Value
American Seafoods Group LLC $3,000 $3,030
Dex Media West, Inc. $ 351 $ 354
JohnsonDiversey Inc. $ 509 $ 511
Maguire Properties, LP $5,000 $4,863
Trump Entertainment Resorts Holdings LP
Revolving Line of Credit $5,000 $4,875
Trump Entertainment Resorts Holdings LP
Term Loan B-1 $2,487 $2,517
United Air Lines $ 469 $ 469
Vought Aircraft Industries, Inc $6,000 $5,760
5. Short-Term Borrowings:
The Trust, along with certain other funds managed by FAM and its affiliates,
is a party to a $500,000,000 credit agreement with a group of lenders. The
Trust may borrow under the credit agreement to fund shareholder redemptions
and for other lawful purposes other than for leverage. The Trust may borrow up
to the maximum amount allowable under the Trust's current prospectus and
statement of additional information, subject to various other legal,
regulatory or contractual limits. The Trust pays a commitment fee of .07% per
annum based on the Trust's pro rata share of the unused portion of the credit
agreement. Amounts borrowed under the credit agreement bear interest at a rate
equal to, at each Trust's election, the federal funds rate plus .50% or a base
rate as defined in the credit agreement. On November 23, 2005 the credit
agreement was renewed for one year under substantially the same terms. The
Trust did not borrow under the credit agreement during the six months ended
February 28, 2006.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Disclosure of Investment Advisory Agreement
Activities and Composition of the Board of Directors/Trustees
All but one member of the Fund's Board of Directors and Master Senior Floating
Rate Trust's (the "Trust") Board of Trustees, the members of which are
identical, is a non-interested director and trustee as that term is defined in
the Investment Company Act of 1940, whose only association with Fund Asset
Management, L.P. (the "Investment Adviser") or other Merrill Lynch affiliates
is as a director and trustee of the Fund and the Trust, and of certain other
funds advised by the Investment Adviser or its affiliates. We refer to these
persons as independent directors throughout this report. The Chairman of each
Board is an independent director and nominees to become independent directors
are chosen by a Nominating Committee comprised of independent directors. All
independent directors also are members of each Board's Audit Committee. The
independent directors meet in executive session at each regular Board meeting.
Each Board and each Board's Audit Committee meet in person for at least two
days each quarter and conduct other in-person and telephone meetings
throughout the year, some of which are formal Board meetings and some of which
are informational meetings. Independent counsel to the independent directors
attends all in-person Board and Audit Committee meetings and other meetings at
the request of the independent directors.
Investment Advisory Agreement--Matters Considered by the Board
Every year, each Board considers approval of the investment advisory agreement
with respect to the Fund and the Trust (the "Investment Advisory Agreement")
and throughout each year, reviews and evaluates the performance of and
services provided by the Investment Adviser. Each Board assesses the nature,
scope and quality of the services provided to the Fund and/or the Trust by the
personnel of the Investment Adviser and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory
requirements. Each Board also receives and assesses information regarding the
services provided to the Fund and the Trust by certain unaffiliated service
providers.
At various times throughout the year, each Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered with
respect to the Fund and the Trust are: (a) fees (in addition to management
fees) paid to the Investment Adviser and its affiliates by the Fund and the
Trust, such as transfer agency fees and fees for marketing and distribution;
(b) Fund/Trust operating expenses paid to third parties; (c) the resources
devoted to and compliance reports relating to the Fund's and the Trust's
investment objective, policies and restrictions, and the Fund's/Trust's
compliance with its respective Code of Ethics and the Investment Adviser's
compliance policies and procedures; and (d) the nature, cost and character of
non-investment management services provided by the Investment Adviser and its
affiliates.
Each Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be of high quality. Each Board also believes that
the Investment Adviser is financially sound and well managed and notes that
the Investment Adviser is affiliated with one of America's largest financial
firms. Each Board works closely with the Investment Adviser in overseeing the
Investment Adviser's efforts to achieve good performance. As part of this
effort, each Board discusses portfolio manager effectiveness and, when
performance is not satisfactory, discusses with the Investment Adviser taking
steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors/Trustees--In the
period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, each Board requests and receives materials specifically
relating to the Investment Advisory Agreement. These materials include (a)
information compiled by Lipper Inc. ("Lipper") on the fees and expenses and
the investment performance of the Fund as compared to a comparable group of
funds as classified by Lipper; (b) information comparing the Fund's market
price with its net asset value per share; (c) a discussion by the
Trust's/Fund's portfolio management team regarding investment strategies used
by the Trust/Fund during its most recent fiscal year; (d) information on the
profitability to the Investment Adviser and its affiliates of the Investment
Advisory Agreement and other relationships with the Trust and the Fund; and
(e) information provided by the Investment Adviser concerning investment
advisory fees charged to other clients such as institutional clients or retail
offshore funds under similar investment mandates. The Board also considers
other matters it deems important to the approval process such as payments made
to the Investment Adviser or its affiliates in connection with services
related to the valuation and pricing of portfolio holdings, allocation of
brokerage fees of the Fund, the portfolio turnover statistics of the Fund, and
direct and indirect benefits to the Investment Adviser and its affiliates from
their relationship with the Trust and the Fund. The Board did not identify any
particular information as controlling, and each member of the Board may have
attributed different weights to the various items considered.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Disclosure of Investment Advisory Agreement (continued)
Certain Specific Renewal Data
In connection with the most recent renewal of the Trust's/Fund's Investment
Advisory Agreements in February, 2006, the non-interested Directors'/Trustees'
and Boards' review included the following:
The Investment Adviser's Services and Fund Performance--Each Board reviewed
the nature, extent and quality of services provided by the Investment Adviser,
including the investment advisory services and the resulting performance of
the Fund. Each Board focused primarily on the Investment Adviser's investment
advisory services and the Fund's investment performance. Each Board compared
the Fund's performance - both including and excluding the effects of the fees
and expenses of the Trust and the Fund - to the performance of a comparable
group of funds, and the performance of a relevant index or combination of
indexes. While each Board reviews performance data at least quarterly,
consistent with the Investment Adviser's investment goals, the Board attaches
more importance to performance over relatively long periods of time, typically
three to five years. According to Lipper's ranking of all closed-end no-load
and level-load nonleveraged loan participation funds, for the periods ended
November 30, 2005, the Fund's performance after fees and expenses ranked in
the fourth quintile for the one-year period, in the third quintile for the
three-year period, and in the second quintile for the five-year period. The
Board also considered the Fund's performance based on annualized yields, and
noted the Fund's yield was in the fourth quintile for the most recent fiscal
year, the third quintile for 2002 - 2004, and the fourth quintile for 2001.
The Boards noted that the universe of comparable funds was very small.
Considering these factors, each Board concluded that the nature and quality of
these services supported the continuation of the Investment Advisory
Agreement.
The Investment Adviser's Personnel and Investment Process--Each Board reviewed
the investment objectives and strategies of the Trust and the Fund. Each Board
discussed with senior management of the Investment Adviser's taxable fixed
income investing group the strategies being used to achieve the stated
objectives. Among other things, each Board considered the size, education and
experience of the Investment Adviser's taxable fixed income staff, noting the
Investment Adviser has a management group within the taxable fixed income
department dedicated to analyzing and investing in the types of bank loans
held by the Trust, how that staff used technology to manage its taxable fixed
income funds - including the Fund/Trust - and their investments, and the
Investment Adviser's approach to training and retaining portfolio managers and
other research, advisory and management personnel throughout the firm,
including within the taxable fixed income management group. Each Board
discussed these factors with senior management of the Investment Adviser and
also discussed how the Investment Adviser's staffing and overall approach to
taxable fixed income fund management affected the Fund/Trust. Each Board also
reviewed the Investment Adviser's compensation policies and practices with
respect to the Trust's portfolio manager. Each Board also considered the
experience of the Fund's/Trust's portfolio manager and noted that Mr. Matteo
has over 10 years' experience analyzing and investing in fixed income
securities, including bank loans. Each Board concluded that the Investment
Adviser and its investment staff and the Fund's/Trust's management team have
extensive experience in analyzing and managing the types of investments used
by the Fund/Trust and that the Fund/Trust benefits from that experience.
Management Fees and Other Expenses--Each Board reviewed the Fund's and the
Trust's contractual management fee rate and actual management fee rate as a
percentage of total assets at common asset levels - the actual rate includes
advisory and administrative service fees and the effects of any fee waivers -
compared to the other funds considered comparable by Lipper. It also compared
the Fund's/Trust's total expenses to those of other comparable funds. Each
Board considered the services provided to and the fees charged by the
Investment Adviser to institutional clients and retail offshore funds with
similar investment mandates and noted that the fees charged by the Investment
Adviser to offshore funds were slightly less than the fees charged by the Fund
and the Trust, and fees charged to institutional clients were less than those
being charged to the Fund and the Trust, but determined that the Investment
Adviser provided less extensive services to the institutional clients. Each
Board noted that while the Fund's/Trust's actual total expenses including
investment-related expenses were below the median of comparable funds as
classified by Lipper, the contractual and actual management fees were higher
than those of the median of comparable funds. Each Board concluded that the
Fund's management fee rate and overall expense ratio are reasonable when
compared to those of other comparable funds.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Disclosure of Investment Advisory Agreement (concluded)
Profitability--Each Board considered the cost of the services provided to the
Fund and/or the Trust by the Investment Adviser and the Investment Adviser's
and its affiliates' profits relating to the management and distribution of the
Fund and the MLIM/FAM-advised funds. As part of its analysis, each Board
reviewed the Investment Adviser's methodology in allocating its costs to the
management of the Fund and the Trust and concluded that there was a reasonable
basis for the allocation. Each Board considered federal court decisions
discussing an investment adviser's profitability and profitability levels
considered to be reasonable in those decisions. Each Board concluded that the
Investment Adviser's profits are acceptable in relation to the nature and
quality of services provided and given the level of fees and expenses overall.
Economies of Scale--The Boards considered the extent to which economies of
scale might be realized as the assets of the Fund/Trust increase and whether
there should be changes in the management fee rate or structure in order to
enable the Fund/Trust to participate in these economies of scale. While the
Board concluded that it did not believe that the Trust's assets have reached a
level where such economies are effectively available, the Board will continue
to seek information relating to economies of scale.
Conclusion
After the independent directors deliberated in executive session, the Boards
of the Fund and of the Trust including all of the independent
directors/trustees, approved the renewal of the existing Investment Advisory
Agreement, concluding that the advisory fee was reasonable in relation to the
services provided and that a contract renewal was in the best interests of the
shareholders.
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Officers and Directors/Trustees
Robert C. Doll, Jr., President and Director/Trustee
Ronald W. Forbes, Director/Trustee
Cynthia A. Montgomery, Director/Trustee
Jean Margo Reid, Director/Trustee
Roscoe S. Suddarth, Director/Trustee
Richard R. West, Director/Trustee
Edward D. Zinbarg, Director/Trustee
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
The Bank of New York
100 Church Street
New York, NY 10286
Transfer Agent
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
800-637-3863
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC. FEBRUARY 28, 2006
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-
annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this semi-
annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-
annual report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
as of March 31, 2006.
(a)(1) Mr. Kevin J. Booth is primarily responsible for the day-to-
day management of the registrant's portfolio ("Portfolio
Manager"). Mr. Booth has been a Managing Director of the
Investment Adviser since 2006 and was previously a Director
at the Investment Adviser. He has been a portfolio manager
of the Fund since 2006. He has more than eleven years of
investment experience, including the analysis and management
of senior floating rate loans and the use of leverage
techniques to manage portfolios. Mr. Booth joined MLIM in
1991 and has core experience in bank loans, high yield and
distressed investing.
(a)(2) As of March 31, 2006*:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
Kevin J.
Booth 4 6 0 0 0 0
$ 1,604,127,753 $ 2,532,009,251 $ 0 $ 0 $ 0 $ 0
* As of April 3, 2006, Mr. Booth took on additional asset management responsibilities.
The data represents Mr. Booth's assets under management as of that date.
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the Investment. Adviser and its affiliates, including other
client accounts managed by the Fund's portfolio management team. Investment
decisions for the Fund and other clients are made with a view to achieving
their respective investment objectives and after consideration of such factors
as their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for
more than one but less than all clients. Likewise, because clients of the
Investment Adviser and its affiliates may have differing investment strategies,
a particular security may be bought for one or more clients when one or more
other clients are selling the security. The investment results for the Fund may
differ from the results achieved by other clients of the Investment Adviser and
its affiliates and results among clients may differ. In addition, purchases or
sales of the same security may be made for two or more clients on the same day.
In such event, such transactions will be allocated among the clients in a
manner believed by the Investment Adviser and its affiliates to be equitable to
each. The Investment Adviser will not determine allocations based on whether it
receives a performance based fee from the client. In some cases, the allocation
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Investment Adviser and its
affiliates in the interest of achieving the most favorable net results to the
Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a portfolio
manager will need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise
where (i) the Investment Adviser may have an incentive, such as a performance
based fee, in managing one account and not with respect to other accounts it
manages or (ii) where a member of the Fund's portfolio management team owns an
interest in one fund or account he or she manages and not another.
(a)(3) As of March 31, 2006:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates,
including the Investment Adviser (collectively, "MLIM"), is critical to MLIM's
ability to attract and retain the most talented asset management professionals.
This program ensures that compensation is aligned with maximizing investment
returns and it provides a competitive pay opportunity for competitive
performance.
Compensation Program
The elements of total compensation for MLIM portfolio managers are a
fixed base salary, annual performance-based cash and stock compensation (cash
and stock bonus) and other benefits. MLIM has balanced these components of pay
to provide portfolio managers with a powerful incentive to achieve consistently
superior investment performance. By design, portfolio manager compensation
levels fluctuate--both up and down--with the relative investment performance of
the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries that are fixed on an annual basis represent a relatively small portion
of a portfolio manager's total compensation. This approach serves to enhance
the motivational value of the performance-based (and therefore variable)
compensation elements of the compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent.
To that end, portfolio manager incentive compensation for MLIM and its
affiliates is based on a formulaic compensation program. MLIM's formulaic
portfolio manager compensation program includes: investment performance
relative to general closed-end, non-leveraged, fixed income funds over 1-, 3-,
and 5-year performance periods and a measure of operational efficiency.
Portfolio managers are compensated based on the pre-tax performance of the
products they manage. A discretionary element of portfolio manager compensation
may include consideration of: financial results of MLIM, expense control,
profit margins, strategic planning and implementation, quality of client
service, market share, corporate reputation, capital allocation, compliance and
risk control, leadership, workforce diversity, technology and innovation. MLIM
and its affiliates also consider the extent to which individuals exemplify and
foster Merrill Lynch's principles of client focus, respect for the individual,
teamwork, responsible citizenship and integrity. All factors are considered
collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in
a combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based
bonus is paid in restricted shares of Merrill Lynch & Co., Inc. (herein, the
"Company") stock. Paying a portion of annual bonuses in stock puts compensation
earned by a portfolio manager for a given year "at risk" based on the Company's
ability to sustain and improve its performance over future periods. The
ultimate value of stock bonuses is dependent on future Company stock price
performance. As such, the stock bonus aligns each portfolio manager's financial
interests with those of the Company shareholders and encourages a balance
between short-term goals and long-term strategic objectives. Management
strongly believes that providing a significant portion of competitive
performance-based compensation in stock is in the best interests of investors
and shareholders. This approach ensures that portfolio managers participate as
shareholders in both the "downside risk" and "upside opportunity" of the
Company's performance. Portfolio managers therefore have a direct incentive to
protect the Company's reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and
financial management objectives during a performance year are eligible to
participate in a deferred cash program. Awards under this program are in the
form of deferred cash that may be benchmarked to a menu of MLIM mutual funds
(including their own fund) during a five-year vesting period. The deferred cash
program aligns the interests of participating portfolio managers with the
investment results of MLIM products and promotes continuity of successful
portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based
plans offered generally to the Company's employees, including broad-based
retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of March 31, 2006,
Mr. Booth does not beneficially own any stock issued by the
Fund.
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
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined
that the registrant's disclosure controls and procedures are
effective based on our evaluation of these controls and procedures
as of a date within 90 days prior to the filing date of this
report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17
CFR 270.30a-3(d)) that occurred during the last fiscal half-year of
the period 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 attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
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.
Merrill Lynch Senior Floating Rate Fund II, Inc. and Master Senior Floating
Rate Trust
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Senior Floating Rate Fund II, Inc. and
Master Senior Floating Rate Trust
Date: April 20, 2006
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/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Merrill Lynch Senior Floating Rate Fund II, Inc. and
Master Senior Floating Rate Trust
Date: April 20, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Merrill Lynch Senior Floating Rate Fund II, Inc. and
Master Senior Floating Rate Trust
Date: April 20, 2006