Many investors have the perception that the below-investment-grade ratings carried by senior loan-issuing companies signify a lack of size, skilled management, or even profitability. While such companies do exist, below-investment-grade ratings are typically assigned to entities that choose to capitalize themselves with more debt relative to their investment-grade counterparts.
The reality is that senior loan issuers are generally well-functioning companies, many with whom you might be familiar.
Household Names Issue Senior Loans
Many senior loan issuers are well-known industry leaders. Household name companies have issued or do issue senior loans, which may help them lower interest costs and/or provide more flexibility in terms of refinancing versus other forms of debt.
On average, senior loan issuers have successfully met 96.8% of their scheduled interest and principal obligations. This is implied by a long-term default rate of 3.2%.1 Importantly, in the rare case of default, senior loan investors would collect ahead of high-yield bondholders and equity shareholders.
- High income potential, low volatility relative to high-yield bonds, and potential diversification benefits?
- Lower interest rate risk exposure than traditional fixed income?
- A time-tested investment team and process?
Oppenheimer Senior Floating Rate Fund has historically provided higher yields than traditional fixed income, as well as its peer group average.2 The Fund is managed by the Oppenheimer Senior Corporate Loan Team and has had the same portfolio manager at the helm since the Fund’s 1999 inception. By employing a fundamental, bottom-up approach that looks at the senior loan market on a security-by-security basis, the team and Fund have historically offered investors solid yields and performance relative to peers.2
- ^Source: JPMorgan Research, 12/31/16. Long-term default rate refers to the period 1998–2015.
- a, bSource: Morningstar, Inc., 9/30/17. The Morningstar Bank Loan Funds Category Average is the average return of all funds within the investment category as defined by Morningstar. Returns include the reinvestment of distributions but do not consider sales charges. Performance is shown for illustrative purposes only and does not predict or depict the performance of the Fund.
The performance data quoted represents past performance, which does not guarantee future results. The investment return and principal value of an investment in the Fund will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than the original cost. Current performance and expense ratios may be lower or higher than the performance data quoted. For performance data current to the most recent month-end, visit oppenheimerfunds.com or call 1 800 CALL OPP (225 5677). Fund returns include changes in share price, reinvested distributions, and a 3.50% maximum applicable sales charge except where “without sales charge” is indicated. Class Y shares are not subject to sales charge. Returns do not consider capital gains or income taxes on an individual’s investment.
OppenheimerFunds is not undertaking to provide impartial investment advice or to provide advice in a fiduciary capacity.
The mention of specific companies does not constitute a recommendation on behalf of the Fund or by OppenheimerFunds, Inc. As of 12/31/16, Oppenheimer Senior Floating Rate Fund had 0.39% of its assets invested in Revlon; 0.00% in Hanesbrands; 1.11% in Weight Watchers; 0.00% in Goodyear Tire; 0.48% in American Airlines; 0.18% in Burger King; 0.08% in Four Seasons; 0.59% in Albertson’s; 1.19% in Dell Computers; and 0.00% in T-Mobile USA. Holdings are subject to change and are dollar weighted based on assets.
Mutual funds and exchange traded funds are subject to market risk and volatility. Shares may gain or lose value.
Senior loans are typically lower rated and may be illiquid investments (which may not have a ready market). The Fund may invest without limit in lower rated securities. The Fund may invest a variable amount in debt rated below “B.” The Fund may invest 25% or more of its assets in securities issued by companies in the financial services sector which may be susceptible to economic and regulatory events, and increased volatility. Foreign investments may be volatile and involve additional expenses and special risks, including currency fluctuations, foreign taxes and geopolitical risks. Emerging and developing market investments may be especially volatile. Fixed income investing entails credit risks and interest rate risks. When interest rates rise, bond prices generally fall, and the Fund’s share prices can fall. Derivative instruments whose values depend on the performance of an underlying security, asset, interest rate, index or currency, entail potentially higher volatility and risk of loss compared to traditional stock or bond investments. The Fund may use leverage (borrowing) which involves transaction and interest costs on amounts the Fund borrows, which may reduce performance.
These views represent the opinions of the portfolio managers at OppenheimerFunds, Inc. 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.