Myth 2: Interest rate floors built into many floating rate loans are a negative attribute of these loans: Senior loans are floating rate. As rates rise, the interest rates these loans pay eventually rises. Currently, approximately 80% of the loans in the S&P/LSTA U.S. Leveraged Loan 100 Index have interest rate floors that have protected buyers from the current extremely low rate environment. As rates rise above those floors, the loans can be expected to pay even higher interest rates. Meanwhile, lenders are getting higher rates due to these floors than had the floors not been in place. Prices of fixed rate bonds of course fall as bond yields rise.
Myth 3: The liquidity of the loan market is nonexistent: During the first four months of 2014 over $198billion of senior loans have traded in the secondary market. The 100 constituents of the S&P/LSTA U.S. Leveraged Loan 100 Index represented 25% of the trade volume (over $50billion). The Index is designed to track the most liquid of these senior loans and results in tracking over $237billion of loans by market value.
This article was written by J.R. Rieger, global head of fixed income, S&P Dow Jones Indices.
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