Learning to Love Leverage Loans in a Low-Yield Environment | ETF Trends

The tide could turn for high-yield bond ETFs, especially now that the Federal Reserve is supporting that market and that could be meaningful for senior or leveraged loan funds.

Leveraged loans usually attract investors who are looking to generate income in a rising interest rate environment due to their floating rate component. However, central banks and agencies like the International Monetary Fund warned that credit quality is declining – bank loans are usual for highly leveraged companies and are rated speculative-grade.

With the bank loan market in focus this year because of weakness in the broader corporate bond space, investors looking to tap this high-yielding asset class may want to consider doing so via active management, the style of the SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN).

“Within the high-yield bond market, a sizable proportion of the issuance has come from companies selling high-yield bonds to pay down floating-rate bank loans, according to Goldman Sachs,” reports Alexandra Scaggs for Barron’s.

Banking on Bank Loans

SRLN is a consideration in this asset class because bank or leveraged loans are a group where active management can work in favor of investors.

SRLN invests in senior loans given to businesses operating in North America and outside of North America. The Portfolio may invest in senior loans through the loans directly via the primary or secondary market or via participation in senior loans, which are contractual relationships with an existing lender in a loan facility where the loan portfolio purchases the right to receive principal and interest payments.

“Goldman Sachs says that the loan market is starting to look good in comparison with the market for high-yield bonds because companies are continuing to pump supply into the bond market,” according to Barron’s.

By including senior loans in SRLN’s portfolio, the loans first lien priority, meaning in the event of a borrower default, the senior loans are paid first. Higher payment priority assists liquidity in terms of the defaulting borrower having to sell assets in order to pay off creditors–in this case, senior loans within the SRLN portfolio are given higher priority–a viable option, especially during a market downturn.

“On the technical side, the extremely weak net supply picture for leveraged loans should continue to provide an offset to the still weak backdrop for demand,” notes Goldman Sachs.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.