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A Case for Senior Secured Loans

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A Case for Senior Secured Loans pi06LSTA_p.qxp 1/28/11 10:46 AM Page 1 ADVERTISING SUPPLEMENT Visit www.pionline.com/securedloans for exclusive featured content, white papers and web seminar pi06LSTA_p.qxp 1/28/11 10:46 AM Page 2 ADVERTISING SUPPLEMENT SPONSOR DIRECTORY The Loan Syndications and Trading Association - LSTA 366 Madison Avenue, 15th Floor New York, NY 10017 Contact: Alicia Sansone Executive Vice President Tel. 212-880-3002 [email protected] www.lsta.org Eaton Vance Management 2 International Place Boston, MA 02110 Contact: Scott Ruddick Head of Institutional, North America Tel. 617-672-8300 [email protected] www.eatonvance.com Highbridge Principal Strategies, LLC 40 West 57th Street New York, NY 10019 Contact: Faith Rosenfeld Tel. 212-287-6747 [email protected] www.highbridge.com ING Investment Management 230 Park Avenue, 14th Floor New York, NY 10169 Contact: Erica Evans Head of Institutional Sales and Service Tel. 212-309-6552 [email protected] www.inginvestment.com Invesco 1166 Avenue of the Americas New York, New York 10036 Contact: Kevin Petrovcik Managing Director Tel. 212-278-9611 [email protected] www.invesco.com 2 Visit www.pionline.com/secureloans for exclusive featured content, white papers and web seminar pi06LSTA_p.qxp 1/28/11 10:46 AM Page 3 ADVERTISING SUPPLEMENT CONTENTS 4 14 10 Floating-Rate Loans Poised to Perform 4 Floating-Rate Loans Seek Greater Prominence in Portfolios 10 “Great De-Leveraging” Raises Profile of Floating Rate Loans 14 This special advertising supplement is not created, written or produced by the editors of Pensions & Investments and does not represent the views or opinions of the publication or its parent company, Crain Communications Inc. Visit www.pionline.com/secureloans for exclusive featured content, white papers and web seminar 3 pi06LSTA_p.qxp 1/28/11 10:46 AM Page 4 ADVERTISING SUPPLEMENT Floating-Rate Loans Poised to Perform Although business lending may predate the rise of the bond and equity markets by centuries, loans as a mainstream asset class have only recently gained recognition among the institutional investment community. Now many investment professionals believe that the post-crash environment – with its uncertain out- look for long-term economic growth, stock volatility, financial weakness at every level of government, and the prospect of steadily rising interest rates and inflation — may offer ideal investment conditions for floating-rate corporate loans to perform well, especially compared to other fixed-income alternatives. Corporate loans, or more formally “senior secured floating-rate debt instruments,” are the senior-most debt obligations of non- investment grade corporate borrowers (the same cohort of companies that issue high-yield bonds). Being the senior debt on the balance sheet and secured by collateral means that loans provide a more protected repayment stream to investors, with credit losses that have historically averaged less than half those of high-yield bonds, according to Standard & Poor’s default and recovery statistics. 4 Visit www.pionline.com/secureloans for exclusive featured content, white papers and web seminar pi06LSTA_p.qxp 1/28/11 10:46 AM Page 5 ADVERTISING SUPPLEMENT At the same time, with floating interest rates that The explosive growth of the syndicated loan market are periodically reset at a spread over the London Inter- over the past two decades has brought with it a substantial Bank Offered Rate (LIBOR), loans actually benefit from increase in investment management firms focused on increases in interest rates, as opposed to traditional serving institutional investors in the loan market. It has bonds whose market value decreases when interest rates spurred the development of loan tranches and other rise. The floating-rate feature appeals to investors who investment vehicles designed specifically to meet the want to have a fixed-income component to their portfo- distinct investment preferences of institutional buyers. lios, but feel the current economic environment, with in- Loan-market liquidity has also increased substantially, terest rates at a 30-year low and turning upward, is not an as a result of robust growth in secondary loan trading, opportune time to be betting on interest rates remaining the development of standardized trading, distribution flat or dropping, which is the inherent interest rate bet in and settlement protocols, and the greater transparency any fixed rate bond. and reliability of third-party pricing. Portfolio managers who recognize this have been moving substantial amounts of new money into loan History of steady returns assets in recent months. Retail investors alone were Returns to loan investors have been mostly stable, positive reported by Lipper FMI to have moved almost $3 billion and consistent for the thirteen years since the S&P/LSTA into loan mutual funds during the month of December Leveraged Loan Index began. The two-year worldwide 2010. “Duration risk has become much more of a reality liquidity crisis in 2008 and 2009 affected the loan market to investors as long bond yields have moved up sharply in as it did other credit and equity markets, driving loan- recent months,” said Scott Page, vice president, portfolio market returns down by 30% in 2008 and back up by 52% manager and director of Eaton Vance's Floating-Rate in 2009. Patient “buy-and-hold” investors who held their Loan Group. “For investors who wish to reduce duration loan portfolios through the crisis would have earned a net in their portfolios, floating-rate bank loans are the simplest return of about 8% over the two years, despite the to understand, easiest to trade and most liquid of any resulting recession and some of the highest default levels major fixed-income asset class.” ever recorded. In 2010, the index returned about 10%, as the credit environment improved and loan default rates From “bank loan” to “asset class” fell to below 2%. The investor base for loans has been expanding beyond traditional banks and specialized investment vehicles, like collateralized loan obligations, which were the main- S&P/LSTA Leveraged Loan Index stay of the market until recently. The new investors are more likely to be oriented toward total returns, rather than focused on a spread over LIBOR that they would leverage multiple times. “We believe the institutional loan buyer base is shifting from spread-based buyers like CLOs to total yield-based buyers like managed accounts, high yield and loan mutual funds, and other institutional vehicles,” said David Frey, portfolio manager at Highbridge Principal Strategies. “As a result, we are optimistic that the favorable new issue pricing we have seen recently will continue.” Mr. Frey also thinks that loan demand – much of which is driven by corporate mergers and acquisitions – will continue to grow. “Some of the key drivers of M&A Source: S&P/LSTA Leveraged Loan Index activity are slow organic growth, low interest rates and improving CEO confidence,” he said. “That seems to be the situation today, so we are optimistic that M&A Many loan professionals believe returns may not be activity will increase and present new loan-investment quite so high in 2011, but they could be close. “Loans have opportunities.” traditionally offered stable, predictable returns to The loan market gives traditional institutional in- investors,” said Dan Norman, senior vice president and vestors access to the top of the corporate liability struc- group head of ING's Senior Loan Group. “The liquidity ture – secured loans – instead of being limited to bonds crisis a couple of years ago ended an eleven-year streak (which are unsecured or subordinated) and equity. In the of positive returns, but we have now had two successive past, by ceding the better secured, floating-rate loan positive years. I think there is every reason to believe assets to the commercial banks, investors left quite a bit loans are on their way to establishing a new streak of on the proverbial table in terms of attractive risk/reward attractive positive returns.” returns, cash-flow stability and portfolio diversification. Mr. Norman, like many loan managers, expects loan But they essentially had no choice. Until recently, there returns could exceed historical averages in 2011, based on were few investment vehicles providing large-scale a combination of gross yields and continuing capital ap- institutional access to the loan asset class. preciation. If he is right – and many other banks and loan Visit www.pionline.com/secureloans for exclusive featured content, white papers and web seminar 5 pi06LSTA_p.qxp 1/28/11 10:46 AM Page 6 ADVERTISING SUPPLEMENT researchers are publishing estimates in the same range – risk and interest-rate risk. The higher the credit quality then the loan market’s “new normal” returns may actu- of the bond issuer and the lower the likelihood of default, ally be somewhat higher than their pre-crash “old nor- the more a bond becomes essentially a bet on the direction mal.” of interest rates. In the high-yield world, the situation is The loan market’s performance through the most more complicated, partly because the credit risks vary challenging credit environment since the 1930s has con- considerably between loans and bonds. firmed to many observers and investors the durability of Also, the nature of the interest-rate bet inherent in senior, secured loan assets from a credit perspective. It each instrument is different. Because loans are gener- has also contributed to growing interest by institutional ally the senior-most debt of the issuer and are secured by investors in senior secured loans as a mainstream asset collateral and other protective features, they typically de- class – one that deserves a permanent position in a fixed- fault less frequently than high-yield bonds. Moreover, income allocation whether it be an individual, pension when they do default, loan investors generally recover at fund, endowment or other long-term portfolio – rather a consistently higher rate than bond investors, as a than just a position as an alternative or opportunistic in- result of having collateral.
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