“U.S. corporate profits are largely solid and balance sheets are generally cash-rich. In addition, moderate leverage should help issuers meet their debt obligations. Against this backdrop, we expect floating rate default rates to remain lower this year than their historical average, and at far lower levels than what’s currently being imputed in the marketplace,” said Neuberger Berman in a note out earlier this week.
The research firm notes that the credit quality of new bank loan issues coming to market is increasing. In the first quarter, 40% of newly issued senior loans were rated B, BB or higher, up from 30% in 2013 and 2014. [Reconsidering Bank Loan ETFs]
Over the past year, investors have consistently pulled money from senior loan funds, indicating that they did not believe a Fed rate hike was imminent. However, the interest rate outlook is changing and that could lead investors back to BKLN and rival ETFs. However, those outflows may not last long and there are catalyst that suggest inflows to bank loan ETFs could be renewed.
“Moving forward, we see the potential for an increase in retail demand: Yields from foreign sovereigns are depressed or in negative territory, and additional quantitative easing in the eurozone and Japan is likely to keep their rates low, making loan yields more attractive by comparison. In the U.S., the Fed’s potential rate increases could draw investors to loans, both for security and as their yields become more attractive,” said Neuberger Berman.
PowerShares Senior Loan Portfolio