Senior loans (also called leveraged loans, syndicated loans, bank loans or floating rate loans) are privately arranged debt instruments that provide capital to a company (usually with a below-investment-grade rating) and are issued by a bank or financial institution and syndicated by a group of banks and institutional investors.
Senior loans are typically issued in conjunction with leveraged buyouts, mergers or acquisitions. A company's payment of interest and repayment of principal on its loan is usually contractually senior to any other form of debt or equity.
Within a company's capital structure, senior loans are typically:
- Senior to the claims of other creditors.
- Protected by performance and leverage based covenants.
- Secured by collateral, such as property, inventory, equipment and intangibles.
Senior loans offer the potential to diversify a fixed-income portfolio through both their distinct structure and their historically low correlation to other fixed-income investments.
Senior Loans: Relationship to Other Segments of the Fixed-Income Market
(S&P/LSTA Leveraged Loan Index)
|10 Years Ended Dec. 31 2012||Correlation to||Beta vs.|
|Barclays U.S. Aggregate||-0.03||-0.06|
|Barclays U.S. Government: Intermediate||-0.42||.1.10|
|Barclays Capital U.S. Municipal Bond||0.28||0.50|
|Barclays U.S. Treasury: U.S. TIPS||0.20||0.24|
|Barclays U.S. Agg Corporate||0.37||0.48|
|Consumer Price Index||0.20||0.84|
|S&P 500 Index||0.59||0.32|
Sources: Bloomberg and Zephyr Style Advisor, as of December 31, 2012 As of the Fund's inception, the index had approximately 28 months of live history. The S&P/LSTA Leveraged Loan Index had more historical data and was used in order to provide more meaningful longer term comparisons.