Since rates are typically reset once per quarter, senior loans typically have low durations – a measure of a bond fund’s sensitivity to changes in interest rates. The floating-rate component also offer investors an alternative method of earning yields while mitigating interest-rate risk. Consequently, bank loans are seen as an attractive substitute to traditional corporate debt in a rising rate environment.
“The demand from CLO’s (Collateralized Loan Obligations) has been insatiable – creating so much demand, that price discovery has also been low,” according to Tchir. “Add to the fact that it is hard to know how ‘senior secured’ you are when there isn’t unsecured debt below you in the capital structure, the dominance of covenant lite loans and you have a recipe for low transparency and little price discovery.”
Tchir adds that leveraged loans could provide more accurate warnings regarding market stress than traditional junk bonds, should that scenario arrive.
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