Debunking Common Myths About Senior Secured Loans

Why is now a good time to consider senior secured loans?

Senior Secured Loans (SSLs) are often overlooked in favour of traditional bonds due to misconceptions about their safety, liquidity and portfolio fit. However, a closer analysis reveals that these loans offer opportunities that make them worthy of consideration in investment portfolios.

It is important to note that in today’s market, senior secured loans present both risks and opportunities for investors. Whilst the market is diverse offering access to a wide range of industries and companies. It is important to lead with caution. Price fluctuations and economic uncertainty poses risks to investments and could result in potential declines.

1. Safety and Priority Myth: Bonds may be safer than loans. 
   1. Reality: SSLs are secured by company assets and depending on the issuer they may have the highest priority in repayment. In some cases, SSLs may be considered more secure than equivalent bonds issued by the same company.
2. Market Size Myth: The loans market can be niche. 
   
   1. Reality: The global SSL market is vast, with a diverse range of issuers across various industries, totaling $1.8 trillion.¹
3. Yield Myth: Traditional bonds potentially yield enough. 
   1. Reality: SSLs generally can offer higher yields with minimal duration risk compared to traditional bonds.² This is because they provide a hedge against rising interest rates and inflation. They offer multiple layers of credit risk protection.³
4. Income Stability Myth: Elevated income levels may not last. 
   1. Reality: Compared to higher yield bonds which are typically unsecured, SSLs have consistently delivered higher levels of reliable income, even during market fluctuations. Between (1987 – 2020), the average debt recovery rate, as measured by ultimate recoveries for US SSL, was 80%, compared to 47% on average for US high yield bonds.⁴
5. Risk Myth: Below investment grade may be risky. 
   1. Reality: SSLs, are secured by assets and are positioned at the top of the capital structure, may mitigate risk effectively. 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. However, as with all investments, SSLs pose a risk to capital.
6. Interest Rate Volatility Myth: Uncertain times can be bad for loans. 
   1. Reality: SSLs have historically been insulated from interest rate volatility.
7. Borrower Fundamentals Myth: It’s commonly believed that all company fundamentals may be weak. 
   1. Reality: Borrower leverage has been declining, and interest coverage ratios remain positive.
8. Market Liquidity Myth: The loan market is potentially illiquid. 
   1. Reality: The SSL market is highly liquid compared to private credit. SSLs are priced daily and offer daily liquidity.
9. Risk Pricing Myth: Markets price risk efficiently
   1. Reality: For a low-risk asset class, we believe the market consistently prices Senior Secured Loans incorrectly – and the data backs us up.
10. Portfolio Fit Myth: Loans may not fit in a diversified portfolio. 
    1. Reality: Including SSLs in a portfolio has the potential to improve risk-adjusted returns.

Understanding the nature of Senior Secured Loans can help investors make informed decisions and potentially leverage the benefits of this often-overlooked asset class.