Floating-rate coupons, senior secured credit: Key loan features
Volatility has flared up across financial markets to start 2022 — geopolitical risks in Ukraine and elsewhere, persistent inflationary pressures, more hawkish global monetary policies, and ongoing COVID-related concerns have been among the main culprits.
Amid increased recession risks in some parts of the world (particularly Europe), and the specter of rising rates to combat higher inflation, bank loans have proven quite resilient relative to other credit sectors. Figure 1 highlights the year-to-date cumulative performance across multiple asset classes. As shown, bank loans weathered much of the impact from both rising rates and spread widening that plagued many sectors, outperforming US high-yield bonds and investment-grade debt by over 450 bps and 575 bps, respectively.
Given the floating-rate nature of their coupons, paired with their senior secured position atop corporate capital structures (i.e., being secured via lien against the borrower’s assets), we believe bank loans may continue to hold up well in the period ahead — and that many investors should (and will) favor the sector over other credit assets in today’s uncertain, potentially volatile environment.