Additionally, many if not most loans have LIBOR floors, generally ranging from 1-1.5%, meaning we would need to see a substantial rise in short-term LIBOR rates before there was any impact on the coupon paid on the loan.
An investor should also keep in mind that with all of the money flowing into the loan asset class and chasing securities over the last couple years, there are now many overvalued names in the space. This has left a vast majority of the market priced around or above par, and with little in the way of call premiums offered in this market, there also appears minimal potential for further price appreciation for many of these loans.
Finally, the general perception seems to be that loans are always less risky than bonds. However the reality is that many companies have debt financing that consists entirely of loans and some of those loans are still part of capital structures that are very highly levered.
At the end of the day, a loan investor may be left with a security that has a low starting yield, little left in the way of capital gains potential, and with coupon income that is not at all increasing even if rates were to rise.
While there are some selective opportunities for value in the loan space, broadly speaking we see high yield bonds as a more attractive market in the current environment.
1 Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Leveraged Loan Market Monitor,” J.P. Morgan North American High Yield and Leveraged Loan Research, January 2, p. 9.
2 Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Leveraged Loan Market Monitor,” J.P. Morgan North American High Yield and Leveraged Loan Research, January 2, p. 1.
3 Acciavatti, Peter, Tony Linares, Nelson Jantzen, CFA, Rahul Sharma, and Chuanxin Li. “Leveraged Loan Market Monitor,” J.P. Morgan North American High Yield and Leveraged Loan Research, January 2, p. 1.
4 Data as of 12/31/13, sourced from Bloomberg.