Private credit: A case for senior loans

As the 3rd quarter comes to a close, there has been a significant focus on the uncertainty of the US macroeconomic backdrop and its potential implications for the senior secured bank loan market. Despite these challenges, we see three compelling reasons to consider investing in senior secured loans now. (This is an excerpt from our latest whitepaper, The case for senior loans. For a deep-dive into the sector and our outlook, read the complete paper.

1. Potential high level of current income

Current income is comprised of two key components—base interest rates (which are expected to stay higher for longer) and credit spreads (which continue to remain wide). Coupon income for bank loans today is 8.81%, which is near its highest since 2009¹ . Market expectations are for rates to remain higher for longer, well above pre-2022 levels. Loans have proven to provide consistent, stable income through varying market cycles, including recessionary periods and periods of falling rates².

2. Rates are expected to stay higher for longer

Loans have virtually no duration risk (average ~45 days). As a floating-rate asset class, high base rates have led to higher coupons, supporting total returns for the asset class. Although coupon rates are anticipated to decrease as the Federal Reserve reduces interest rates, overall interest rates are expected to stabilize at higher levels significantly above those observed over the past decade. The coupon rate over the next 6-12 months is expected to remain above historical averages in the context of the Fed’s intended “recalibration” of interest rate policy.

3. Compelling relative value

Loans have offered one of the best yields in fixed income, while providing downside risk mitigation by being senior in the capital structure and being secured by the assets of the company. Loans are one of the only asset classes that are still offering a historically attractive entry point, with spreads still wide of their long-term averages, compared to most fixed income spreads close to all-time tights. Loans have offered these high yields with no duration risk. In a recessionary environment, loans offer downside risk mitigation by being senior which means they are the highest priority to be repaid in the event of default. Senior secured assets may offer added risk mitigation throughout recessionary periods³.

Read the complete whitepaper, The case for senior loans.