Private credit: A case for senior loans

Private credit: A case for senior loans

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.

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Risk warnings

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

    Most senior loans are made to corporations with the below investment-grade credit ratings and are subject to significant credit, valuation and liquidity risk. The value of the collateral securing a loan may not be sufficient to cover the amount owed, may be found invalid or may be used to pay other outstanding obligations of the borrower under applicable law. There is also the risk that the collateral may be difficult to liquidate, or that a majority of the collateral may be illiquid. Compared to investment grade bonds, junk bonds involve greater risk of default or price changes due to changes in the issuer’s credit quality. Diversification does not guarantee of profit or eliminate the risk of loss.

Important information

  • Data is provided as at the dates shown, sourced from Invesco unless otherwise stated.

    This is marketing material and is not intended as a recommendation to invest in any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. The information provided is for illustrative purposes only. It should not be relied upon as recommendations to buy or sell securities.

    Where individuals or the business have expressed opinions, they are based on current market conditions. They may differ from those of other investment professionals. They are subject to change without notice and are not to be construed as investment advice.