In the current environment, senior secured loans are gaining traction for their potential to offer a blend of attractive yield and protection against both credit and interest rate risk.
In the low-yield environment of recent years, many investors have found it challenging to meet their yield targets. While additional yield has historically been achievable by taking on added risk, investors may be hesitant to add too much risk to their portfolios, especially as the economic cycle matures. In this environment, senior secured loans may be an option worth considering, as the asset class offers a unique blend of attractive yield potential with some protection against both credit and interest rate risk.
Senior secured loans are commonly issued by below investment grade companies and can be used for a range of purposes such as financing acquisitions, refinancing existing debt and supporting expansion plans. The loans are underwritten by a lead bank and syndicated (or sold) to other banks and institutional investors. They pay a floating interest rate—a base rate (LIBOR), plus an additional fixed coupon—to compensate for the credit risk of lending to a below-investment grade company.