Leveraged Loans: Not so obscure anymore

Leveraged loans or Senior Loans once an obscure area in Fixed Income space has seen real growth in assets inflow in last couple of years. Lipper reported a 95 week of net inflows in loan funds that ended in April of this year. What are senior loans and what makes them so attractive in this market.

Senior secured loans: Leveraged Loans or senior loans are on top of a company’s capital structure so they are the first to be repaid before other debt obligations and equity holders.

Higher yields: Most of the debt issued under this category is below investment-grade, thus the securities have higher than comparable investment grade instruments.

Floating rate: Coupon is floating rate, generally pegged to 3 month LIBOR resetting quarterly or on a preset frequency with 0.25 duration, thus the interest rate risk is minimum.

Diversification: Since the instruments are floating rate and get reset as the interest rates rise, it provides a good diversification for a traditional fixed income portfolio.

Recognizing the importance of this asset class, S&P Dow Jones Indices developed the S&P Indices Versus Active (SPIVA) Scorecard dedicated to Senior Loans. SPIVA Scorecard measures the performance of actively managed floating-rate loan funds vs. their benchmark, the S&P/LSTA U.S. Leveraged Loan 100 Index. Here are some of the stats:

  • Active funds fared well over the 12-month period ending Dec. 31, 2013, with the majority of active funds (60%) outperforming the benchmark.
  • However, when viewed over medium- to long-term, three- and five-year horizons, 61.54% and 90.48% of the active loan participation funds underperformed the benchmark, respectively.
  • Over the past five years, the number of loan participation funds has nearly doubled, from 21 to 40, which is a testament to the growing popularity of the asset class.

The posts on this blog are opinions, not advice. Please read our disclaimers.

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