As an investment for insurance companies, broadly syndicated loans can play a key role in enhancing yields, reduce overall portfolio volatility, and provide income while maintaining sufficient liquidity.
The long-term risk/return profile of broadly syndicated loans is favourable compared to high-yield bonds and equities.
The asset class’s strong track record across various market cycles can make them an attractive asset class in the current uncertain monetary and geopolitical environment.
Being a subset of senior secured loans (SSLs), broadly syndicated loans (BSLs) focus on the most liquid part of the SSL market. BSLs are issued by a group of lenders (the ‘syndicate’) to a single borrower. The broadly syndicated loan (BSL) market is below investment grade. As opposed to narrowly syndicated loans (NSLs), BSLs are focused on larger US and European corporations with an average enterprise value of ~US$4 billion in the US market and ~€2-3 billion in the European market.
Like SSLs, BSLs are senior secured and have the highest priority to be repaid, driving higher recovery rates in the event of default, which leads to potential risk mitigation. The floating rate feature of BSL, with an effective duration of 0.25 years can serve as a hedge against interest rate risk and inflation.
As loans are often more complex by nature (involving multiple lenders, detailed covenants, restrictions, etc.), they offer a yield premium to investors. While most loans are issued by privately held companies, an active secondary market – especially for BSLs - ensures that the market is liquid.
As an investment for insurance companies, BSLs can play a key role in enhancing yields, reduce overall portfolio volatility, and provide income while maintaining sufficient liquidity.
As we evaluate the uncertain macroeconomic backdrop in the early days of 2025, we continue to prefer senior secured loans over high yield bonds due to the higher yield and the credit protection mechanism integrated in the loans documentation. Our preference for BSLs is also backed by the Global Asset Allocation 2025 Outlook, where we see a maximum allocation to bank loans in model portfolio owing to its attractive risk-reward trade-off and low correlation with other main asset classes.
From a historic performance perspective, BSLs have recorded positive returns in the vast majority of years, and annual volatility has been relatively low. The Credit Suisse Western Europe Leveraged Loan index, which is representative for the asset class in Europe, provided a total return of 264%, compared to 248% for European high yield bonds (represented by the ICE BofAML European High Yield Index) and 276% for European equities (represented by the MSCI Europe Index) from 1 January 1990 to 31 December 2024.1 BSLs have provided these returns with an annualised volatility of 7.5% vs 10.9% for European high yield bonds and 14.9% for European equities.1 These long-term performance and risk statistics illustrate the attractive risk/return profile of the asset class and its strong track record across various market cycles.
Source: Invesco Vision as at 22 January 2025.
With interest rates expected to be higher over the next years than in the years following the Great Financial Crisis and prior to the COVID pandemic, we believe BSLs can offer very competitive yields. Also, in a volatile macro-economic environment, the relatively low volatility of BSLs compared to high yield bonds and equities are likely even more beneficial. Downside risk is mitigated by BSLs seniority in the capital structure and by the issuer’s collateral, both of which differentiate bank loans from high yield bonds and equities. At the same time, in the face of declining interest rates, loans could remain as a source of strong, steady income as historically the loan market has managed to retain investor capital when rates decline. We do believe the income relative stability make BSLs an attractive asset class for insurance companies.
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1 Source: Invesco Vision, as at 22 January 2025.
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.
This document is marketing material and is not intended as a recommendation to invest in 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.
EMEA4177599/2025
