What Are the Risks of Senior Loans?

Fund holdings are fluid and are subject to daily change based on market conditions and other factors. Priority liens against the borrower’s assets offer a degree of downside protection from potentially higher default rates. A silver lining for many companies when interest rates and inflation are rising is that their fixed-rate debt burden is reduced. The products and services described on this web site are intended to be made available only to persons in the United States or as otherwise qualified and permissible under local law. Nothing on this web site shall be considered a solicitation to buy or an offer to sell a security to any person in any jurisdiction where such offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction.

In the event of a bankruptcy, senior bank loans receive payment before other creditors, preferred stockholders, and common stockholders, when the assets of the borrower are sold off. Standing at the front of the line doesn’t mean much when there is no one behind you; sitting at the senior-most level of the capital structure is less meaningful when there is little or no debt beneath you.

Who issues, manages, and owns CLOs?

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While the yield of senior secured loans is slightly lower than that of junk bonds (4.28% yield to worst),11 it is still substantial in the context of other traditional fixed income asset classes yields, as shown below. Further, it stands to reason that senior secured loans might offer a slightly lower yield than below investment-grade corporates in exchange for the previously discussed investor protections . A collateralized loan obligation is a security backed by a diversified pool of senior loans. The CLO manager will issue debt and equity in order to raise cash from investors, then use this cash to purchase millions of dollars in senior secured loans. The cash flows generated from the underlying senior loans are then passed on to the investors, however they are not paid out equally.

Loan Market Landscape and Investor Base

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Performance:

These bond issues also have fixed interest payments and are generally not secured. However, because investment-grade rated firms have historically experienced lower default rates, investors generally do not require the same level of assurances than high yield debt investors.

• As the investing landscape evolves and interest rates continue to hover at near-record lows, it’s important to consider alternative asset classes that may help investors reach their financial goals.
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• Bank loans may also provide diversification benefits from their low correlation to other assets.
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Why Bank Loan Funds Need Active Management in This Market

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While this helps reduce some of the liquidity challenges, it doesn’t completely solve them. And this keeps the fund from delving into smaller loans available to actively managed funds, which may offer higher returns. Active management is probably a better way to go in this market, in light of its credit and liquidity risks.

To address this mismatch, the fund usually holds around 10% of its assets in cash or cash equivalent securities. While this is in line with the category average, it can act as a headwind to the fund’s performance and cause tracking error to its benchmark. Additionally, the fund typically holds a position in publicly traded high-yield debt. While senior loans may be suitable for some investors, they are very illiquid, so they aren’t well-suited for index investing. These private loans are not registered with the SEC and can be challenging to trade; they tend to trade infrequently, in small amounts, and often have large spreads.

Certain countries have been susceptible to epidemics or pandemics, most recently COVID 19. HPS Corporate Lending Fund is a newly organized Delaware statutory trust https://accounting-services.net/ that seeks to invest primarily in newly originated senior secured debt and other securities of private U.S. companies within the middle market and upper middle…

Overview of Senior Secured Loans

Relative to junk bonds, senior loans have historically exhibited lower correlations to all selected major asset classes in the chart below. Additionally, low volatility from both interest rate changes and credit pressures suggests that bank loans should have low correlation with other investment categories over long periods. The table above shows that only high yield has exhibited a strong correlation to bank loan returns, a phenomenon significantly increased by the global financial crisis.

The rates on bank loans typically readjust at fixed intervals, usually on a monthly or quarterly basis. This sales material must be read in conjunction with the HLEND prospectus in order to fully understand all the implications and risks of an investment in HLEND. This sales material is neither an offer to sell nor a solicitation of an offer to buy securities. An offering is made only under HLEND’s registration statement filed with the Securities Exchange Commission and only by means of the prospectus, which must be made available to you prior to making a purchase of shares.