Similar to bonds, senior loans are debt securities used by companies to raise capital to finance their operations, or potential mergers and acquisitions. They can also be used as a tool to refinance existing debt. But senior loans differ from bonds due to their:
- Floating rate coupons
- Seniority; first priority in repayment
- Secured status; collateralized by company assets.
Senior loans offer floating rate coupons, and thus, typically carry minimal interest rate risk, or duration. This means senior loans have low sensitivity to interest rate movements. Bonds, on the other hand, typically have a higher duration due to their fixed rate coupons.
Senior loans hold a senior/secured position in a company’s capital structure versus the subordinated/unsecured position of bonds. In the case of default, senior loan investors have historically recovered more value than high yield bondholders.
The senior loan market has evolved into a large, diversified market with over 20 sectors. The market consists of mostly U.S., below-investment-grade issuers, many of which are household names.
We believe senior loans continue to be an attractive asset class for the long term due to their:
- High income potential
- Low duration
- Historically low correlation to traditional fixed income asset classes
- Ability to potentially lower volatility within a portfolio
For a deeper education on senior loans, including how they may fit into an investor’s portfolio, answers to frequently asked questions, and current and historical market data, access our Senior Loan Handbook.
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Mutual funds are subject to market risk and volatility. Shares may gain or lose value.
Short-term interest rates and longer term treasury rates may or may not move in tandem directionally or in magnitude.
Senior loans are typically lower rated and may be illiquid investments (which may not have a ready market). Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Fixed income investing entails credit and interest rate risks. When interest rates rise, bond prices generally fall, and a fund’s share price can fall.
These views represent the opinions of the Portfolio Managers and are not intended as investment advice or to predict or depict the performance of any investment. These views are as of the publication date, and are subject to change based on subsequent developments.