Business loans are picking up, which can open up opportunities for savvy fixed income investors looking to get extra yield. More specifically, investors can look at senior loans to get exposure to this loan growth.
“Demand for business loans is picking up in the United States as an economic recovery drives consumer spending and encourages companies to bulk up inventories, fueling optimism it will boost banks’ 2022 growth,” a Reuters article says.
“People are rebuilding their inventories,” said Terrance Dolan, chief financial officer for U.S. Bancorp. “They’re starting to make business investment ahead of the consumer spend and the economic growth that they see in 2022.”
Being in Senior Loan Position
Fixed income investors looking at opportunities in business loans may want to consider an ETF that stresses the importance of being in senior loan position. This all comes in the convenience of an ETF wrapper with the Invesco Senior Loan ETF (BKLN).
BKLN seeks to track the investment results of the S&P/LSTA U.S. Leveraged Loan 100 Index. The advisor and the fund’s sub-advisor define senior loans to include loans referred to as leveraged loans, bank loans, and/or floating rate loans.
Banks and other lending institutions generally issue senior loans to corporations, partnerships, or other entities. Senior loans are typically used for business re-capitalization financing, acquisitions, leveraged buyouts, and refinancing. BKLN’s loan portfolio will include the purchase of loans from banks or other financial institutions through assignments or participations.
The inherent risks associated with senior loans are similar to the risks of junk bonds, but have seniority. In the event of a default where the business is forced to sell its assets in a liquidation scenario, the senior loan will be paid first. In addition, senior loans are secured by assets whereas junk bonds are not, making them a more attractive investment option when constructing a loan portfolio.
BKLN may acquire a direct interest in a senior loan from the agent or another lender via an assignment or an indirect interest in the loan by participating in another lender’s portion of a loan. BKLN sells the loans within the portfolio through an assignment, but it may also sell participation interests in the loans in order to fund redemption requests.
Of course, fixed income investors want to know what yield the ETF can bring. As of February 7, the 30-day SEC yield on BKLN is close to 3%.
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