Viewpoint on the Loan Market
With interest rates at or near record lows, finding prudent and diversified sources of income has become one of investors' top challenges. Leland Hart, Managing Director and portfolio manager on the BlackRock Leveraged Finance Team, believes floating rate loans, given their attractive current yields and above-average capital appreciation potential, offer investors something to get excited about.
What makes loans so attractive today?
Loans far outyield Treasuries, so there's a great benefit in terms of current income. The average loan today also trades at a discount to par, so we have upside potential from a price perspective as well. In addition, most investors today are focused on the threat of rising interest rates and the impact that would have on the value of their fixed income portfolios. Loans, because they are floating rate instruments, do not experience price declines with a rise in interest rates. And, when rates rise, the coupon on a loan increases.
With short-term rates at record lows, is it too early to invest in loans?
While we don't expect rates to rise anytime soon, they will eventually need to come off their lows. So, I don't think it's too early to invest in floating rate loans. The combination of high current income, the price discount and the potential to benefit from rising rates is an appealing proposition. Loans also have a record of historically low volatility thanks in part to their position in the senior secured portion of the capital structure. Taken together, I think it's an excellent time for investors to consider loans.
How can investors access the loan market?
The loan market is limited to institutional investors, so individual investors cannot access it on their own. They can, however, tap into this opportunity by investing in a bank loan mutual fund, which offers the benefits of professional management and portfolio diversification. Bank loans are subject to risks, as the borrowers are primarily rated below investment grade, so the benefit of professional management, and the in-depth company and credit analysis that comes along with it, cannot be overstated.
* Archived articles are current as of the original date of publication.