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Selective Underwriting

SRLN primarily invests in senior loans given to businesses operating in North America, but loans may also originate from businesses operating outside of North America. The Portfolio may invest in senior loans through the loans directly via the primary or secondary market or via participations 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.

SRLN seeks to construct a portfolio of loans that are less volatile than the general loan market. In order to maximize loan portfolio performance, SRLN adds or removes loans that it believes will cause the portfolio to outperform or underperform versus the primary and secondary indexes.

The selective loan portfolio must include companies that meet the following criteria:

  • Leading, defensible market positions: SRLN intends to invest in companies that it believes have developed strong positions within their respective markets and exhibit the potential to maintain sufficient cash flows and profitability to service their obligations in a range of economic environments.
  • Investing in companies with positive cash flow: SRLN intends to invest primarily in established companies which have demonstrated a record of profitability and cash flows over several economic cycles.
  • Proven management teams: SRLN intends to focus on investments in which the target company has an experienced management team with an established track record of success.
  • Private equity sponsorship: SRLN will seek to participate in transactions sponsored by what it believes to be high-quality private equity firms.
  • Diversification, concentration and reliance on other lenders: SRLN will seek to invest broadly among companies and industries, thereby potentially reducing the risk of a downturn in any one company or industry having a disproportionate impact on the portfolio.

Senior Loan Priority During Default

The inclusion of senior loans in SRLN’s portfolio gives these particular 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.

Related: Global Corporate Debt Growing at Rapid Pace

Strong Performance

SRLN has seen positive returns given their total returns year-to-date, the past year and the last three years.

  • Year-to-date: Up 1.62 percent
  • 1-year: Up 3.48 percent
  • 3-year: Up 2.62 percent

For more investment options in fixed income ETFs, visit the Fixed Income Channel.