High yield bank loans are loans made to non-investment grade companies. These loans are senior in the company’s capital structure and are typically secured by the company’s assets. Bank loans also have a floating rate coupon, meaning the yield on the bank loans fluctuates with interest rates.
Why Bank Loans?
- Seniority in the capital structure means that borrowers are contractually obligated to make payments on their loans before payments to other creditors, which generally results in a higher recovery rate.
- Leveraged loans are typically secured by the company’s physical assets, which helps to preserve principal value, reduce volatility, and can lead to higher recovery rates.
- Floating rate coupons act as a hedge against rising interest rates, historically performing very well during inflationary environments.
- High yield loans offer yield improvement relative to investment grade bonds with considerably shorter duration, and generally similar volatility characteristics.
- Bank loans can be viewed as a logical substitute or supplement to a core fixed income allocation.
Over the past decade, bank loans have transitioned from being a bank-dominated market to an institutionally accepted asset class with a market value of over $1.7 trillion at the end of 2014. During this transition, there have been many positive developments, including better liquidity, greater transparency, broader diversification, total return benchmarks, trade groups, public ratings, and standardized trade documentation. At SHENKMAN CAPITAL, we have a long track record of managing loans and understand their unique attributes.