Senior Loan ETFs: Rewards and Risks

A senior loan is a private loan taken from an underwriting bank or a syndicate of lenders. The loans are secured in that they are backed by the borrowers’ assets, which act as collateral. If the borrower defaults, lenders have a senior claim on the defaulters’ assets. However, protections against borrowers’ debt levels are weakening, suggests Morningstar.

“This change implies that lenders and investors of the loan have less protection if the company’s financial health starts to deteriorate. But it is also a reflection of confidence in the market that a majority of investors expect to be paid back in full even without those guards,” according to the research firm.

Morningstar has a Neutral rating on BKLN.

For more information on the fixed-income assets, visit our bond ETFs category.