Article

Senior secured loans: investing in a “higher for longer” interest rate environment

Senior Secured loans investment insights

Senior secured loans: why now?

Many of the most commonly used fixed income investments, such as high-quality government bonds, generate negative or low real returns in today’s high inflation environment. Consequently, these investments pose a significant duration risk to portfolios.

Despite inflation expectations being anchored, inflation remains high, and the US Federal Reserve has signalled a hawkish stance to keep rates higher for longer.

We believe the current uncertain market environment calls for fundamental changes in asset allocation in order to meet long-term real return targets.

We favour a fixed income allocation that:

  1. Allows for a flexible response to future interest rate movements.
  2. Offers attractive yields in a low yield environment.
     

Key features of senior secured loans

We believe that senior secured loans have several features that can help meet the needs of investors:

  • Attractive current income – independent from market environment.
  • Minimal duration risk – providing a hedge against rising interest rates and inflation.
  • Historic record of low volatility of investment returns compared to traditional asset classes.
  • Strong historic and current risk-adjusted return profile.
  • Implied comprehensive credit risk mitigation mechanisms.
  • Low historical correlation of returns – providing potential portfolio diversification benefits.

This paper looks to provide a detailed introduction to the asset class and takes a deep dive into some of the features listed above. We also have a Q&A with Kevin Petrovcik, a senior client portfolio manager at our global bank loans business.

Download the whitepaper to learn more

In this educational whitepaper, we:

  • Introduce the asset class
  • Compare senior secured loans to high yield bonds
  • Address questions around trading and liquidity
  • Look at the role senior secured loans play in a diversified portfolio
  • Share case studies and scenario analysis
Senior secured loan whitepaper 2023
Download as PDF

Frequently asked questions

Senior secured loans are privately arranged loans issued to a consortium of banks and institutional creditors. They provide companies with access to debt capital. Senior secured loans traditionally offer a fixed spread over a reference rate, making them ‘floating rate’ instruments.

These terms are typically used interchangeably to refer to the asset class. The ‘senior’ or ‘senior-secured’ label refers to the fact that the asset class sits at the top of the borrower’s capital structure.

Senior secured loans sit at the top of a company’s capital structure. This means that investors are effectively ranked first for any repayment in the event of a default by the issuer.

Senior secured loans sit at the top of the capital structure, above high yield bonds. While senior loans are backed by the assets of the borrower, high yield bonds are typically unsecured.

Furthermore, senior loans are floating rate instruments, while high yield bonds are issued with a fixed coupon. 

Our team has been managing senior secured loans for clients around the world for over 30 years. Today, we are responsible for over $40 billion in assets.1 We manage institutional and retail portfolios for clients seeking income and yield within the global credit markets.

We use our credit expertise and market-leading position to provide investors unique access to attractive investment opportunities in senior secured loans. Our presence across all distribution channels means we are always active in the market and able to get an early look at attractive primary and secondary opportunities. Finally, our private-side orientation gives our analytical team an information advantage and edge in credit evaluation and execution relative to competitors.

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Footnotes

  • Source: Invesco as of 31 August 2023.

Investment risks

  • The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

    Alternative investment products may involve a higher degree of risk, may engage in leveraging and other speculative investment practices that may increase the risk of investment loss, can be highly illiquid, may not be required to provide periodic pricing or valuation information to investors, may involve complex tax structures and delays in distributing important tax information, are not subject to the same regulatory requirements as mutual portfolios, often charge higher fees which may offset any trading profits, and in many cases the underlying investments are not transparent and are known only to the investment manager. 

Important information

  • Information is provided as at 30 September 2023, sourced from Invesco unless otherwise stated.

    This is marketing material and not financial advice. It is not intended as a recommendation to buy or sell any particular asset class, security or strategy. Regulatory requirements that require impartiality of investment/investment strategy recommendations are therefore not applicable nor are any prohibitions to trade before publication. Views and opinions are based on current market conditions and are subject to change.

    Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals, they are subject to change without notice and are not to be construed as investment advice.