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Senior loans: our approach to ESG
January 23, 2022
Key takeaways
Investors are looking for bank loan managers with a quantifiable approach to ESG.
They also need us to actively engage with management on their ESG policies and progression.
We have developed an award-winning ESG framework for rating private companies and issuers.
What are senior loans?
Senior loans are an alternative asset class – they are privately arranged debt instruments (usually below investment grade).
Investors look to add bank loans to their asset allocation strategies because they provide appealing returns through various economic cycles. They are senior in the capital structure, secured by all assets of the company, and they provide stable current income floating with prevailing interest rates.
However, loans are not a security. Each loan has unique characteristics tailored to the underlying corporate issuer.
Often senior secured loan issuers are private companies or may be sponsored by a private equity firm with no publicly available information.
Our ESG approach
A growing segment of our bank loan clients are focused on ESG and have asked for a commingled ESG managed bank loan portfolio.
In 2015, we began to formally incorporate ESG considerations into our investment process as part of our consideration of credit risk for each issuer.
However, investors are seeking a quantifiable approach to better understand our ESG considerations, as well as our ability to screen out issuers.
More importantly, they are looking for bank loan managers that will actively engage with management on their ESG policies and progression.
We offer investors a rigorous multi-pronged approach to ESG screening. We discuss this approach in detail in the below paper.
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Investment risks
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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.
The strategy is particularly dependent on the analytical abilities of its investment manager on senior loans. Many senior loans are illiquid, meaning that the investors may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the senior loans. The market for illiquid securities is more volatile than the market for liquid securities. The market for senior loans could be disrupted in the event of an economic downturn or a substantial increase or decrease in interest rates. Senior loans, like most other debt obligations, are subject to the risk of default. The market for senior loans remains less developed in Europe than in the U.S. Accordingly, and despite the development of this market in Europe, the European Senior Loans secondary market is usually not considered as liquid as in the U.S. Many senior loans are illiquid, meaning that the investors may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the senior loans. The market for illiquid securities is more volatile than the market for liquid securities. The market for senior loans could be disrupted in the event of an economic downturn or a substantial increase or decrease in interest rates. Senior loans, like most other debt obligations, are subject to the risk of default.
Important information
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All data is provided as at the dates shown, sourced from Invesco unless otherwise stated.
This is marketing material and 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.
Where individuals or the business have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.
This document does not form part of any prospectus. It contains general information only and does not take into account individual objectives, taxation position or individual financial needs. It does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Nor does it constitute an offer or solicitation by anyone in any jurisdiction in which such an offer is not authorised or to any person to whom it is unlawful to make such an offer or solicitation.
As with all investments, there are associated inherent risks. Please obtain and review all relevant materials carefully before investing.
Many senior loans are illiquid, meaning that the investors may not be able to sell them quickly at a fair price and/or that the redemptions may be delayed due to illiquidity of the senior loans. The market for illiquid securities is more volatile than the market for liquid securities. The market for senior loans could be disrupted in the event of an economic downturn or a substantial increase or decrease in interest rates. Senior loans, like most other debt obligations, are subject to the risk of default.
