Investors, though, should not forget that senior bank loans are denoted high-yield because the issuing firms are highly leveraged, and highly leveraged companies are more at risk of default and bankruptcy. Nevertheless, these bank loans are slightly safer than traditional high-yield bonds since they are secured by collateral and have historically shown lower default rates.
“In today’s tight credit spread environment, senior loans warrant consideration not only for their income generation opportunities but also for their ability to potentially mitigate cyclical credit risks and any negative effects from spread-widening,” said State Street in a recent note. “Since 1994, senior loans have outperformed high yield bonds by an average of 0.59% during months when credit spreads widened. In the 20 months in which spreads widened the most, senior loans had been impacted far less, generating negative performance that was above the lesser performing high yield asset class—ultimately preserving more yield in a portfolio’s speculative grade credit bucket.”
The actively managed bank loan ETF options could provide investors with better exposure as a manager is more freely able to weave in and out of the fixed-income market. For instance, Blackstone/GSO, which subadvises SRLN, is backed by one of the largest senior loan asset managers in the world.
“Senior loans offer a floating rate coupon that resets every three months, a structure that has allowed senior loans to outperform traditional fixed rate high yield in rate hike cycles like the one we’re in today. In the last three rising interest rate periods, senior loans have returned an average 6.5%, while high yield bonds have returned an average of just 2%,” according to State Street.