Private credit: A case for senior loans

Looking back at 2024, 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 8.26%, 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 rates.

2. Rates are expected to stay higher for longer

Loans carry minimal duration risk, with an average duration of approximately 45 days. As a floating rate asset class, the high base rates have resulted in elevated coupons, thereby enhancing total returns. While coupon rates are projected to decline as the Federal Reserve lowers interest rates, overall interest rates are expected to stabilize at levels significantly higher than those seen over the past decade. In the context of the Federal Reserve System’s planned "recalibration" of interest rate policy, the coupon rate over the next 6-12 months is anticipated to remain above historical averages. As of December 31, 2024, only a single 25 basis point rate cut is expected for the entirety of 2025, which is likely to further boost loan returns for the full year.

3. Compelling relative value

Loans have consistently provided some of the best yields in the fixed income market, while also offering downside risk mitigation due to their senior position in the capital structure and being secured by the company's assets. Currently, loan spreads are near historical levels, in contrast to high-yield bond spreads, which are close to all time tights not seen since before the GFC in 2008. This makes loans have an attractive entry point. Additionally, loans offer these high yields without any duration risk. In a recessionary environment, loans provide further downside risk mitigation by being senior, meaning they have the highest priority for repayment in the event of default. Therefore, the senior secured nature of these assets may offer added risk mitigation during economic downturns.

Read the complete whitepaper, The case for senior loans.