Three reasons to consider senior loans
The uncertain US macroeconomic backdrop with inflation pressures, interest rate hikes, and a potential recession was a significant focus throughout 2023. Despite these challenges, we see three compelling reasons to consider investing in senior secured loans now. (This is an excerpt from our latest whitepaper, The case for senior loans. For a deep-dive into the sector and our outlook, read the complete paper.
1. High level of current income
Current income has two key components — base interest rates (which are expected to stay higher for longer) and credit spreads (which continue to remain wide). The current coupon income for bank loans is approximately 9%, the highest it’s been since 2009.1 Plus, market expectations are for rates to remain high and well above pre-2022 levels. Bank loans have proven to provide consistent, stable income through varying market cycles, including recessionary and falling rate periods.
2. Floating rate feature
Loans have virtually no duration risk (average duration is 45 days) and may benefit from rising rates as coupons reset to higher base rates, the secured overnight financing rate (SOFR). While there’s uncertainty around the Federal Reserve’s next moves, the market is still pricing in potentially one more rate increase before plateauing throughout 2024. This environment can benefit senior secured bank loan investors through higher coupon income whether rates increase or not.2
3. Compelling relative value
Loans have offered one of the best yields in fixed income with no duration risk, while providing downside risk mitigation because they’re senior in the capital structure and secured by the company’s assets. In a recessionary environment, senior loans can offer downside risk mitigation for the same reason.