Research reveals strong institutional appetite for senior bank loans
Some 42 per cent of pension funds believe institutional investors have increased their exposure to senior bank loans over the past six months, according to research by ING Investment Management.
ING IM has seen assets under management in its senior bank loan strategies increase by 46 per cent over the past 12 months, from USD13 billion to USD19 billion.
Its Senior Loans strategy portfolio has delivered an annualised return of 5.28 per cent over the past three years (0.47 per cent above the S&P/LSTA Leveraged Loan Index Hedged to Euro).
Growing demand for this asset class is expected to continue as the research reveals that four out of ten (40 per cent) pension funds expect institutional investors to increase their exposure over the next 12 months, compared to eight per cent who think it will fall ‘slightly’.
Senior bank loans are extensions of credit made to non-investment grade corporations. They are private issues traded directly among banks and institutional investors in a private secondary market and not on a public exchange. They are generally secured by a borrower’s assets pursuant to a first priority or “senior” lien, and they are first in priority in receiving payments when a borrower is servicing its debts. They can also be called “floating rate loans” because the interest paid on such loans changes as certain market interest rates change.
The interest rate reset period varies from loan to loan, but a large, diversified portfolio of senior loans can be expected to have a weighted average interest rate reset period of 60 days or less. As a result, the income earned from a senior loan portfolio is generally very responsive to changes in short-term interest rates. Because the price of senior loans is less sensitive to market interest rates than bonds, they provide a high degree of diversification to a fixed income portfolio. The asset class saw huge inflows in 2013 because of its strong performance – they currently provide typical yields of up to five per cent – in a difficult market.
When asked what the main benefit of investing in senior bank loans is, 29 per cent of pension funds said diversification of a fixed income portfolio, followed by 19 per cent who said attractive risk adjusted returns. One in seven (14 per cent) said it was because the default risk is low.
Dan Norman, managing director and group head of ING IM’s senior bank loans team, says: “In today’s environment, investors are on the hunt for attractive sources of yield. Senior bank loans offer an excellent balance of income and security, and these characteristics have fuelled strong demand for this asset class over the last couple of years. We believe that this will continue. The potential for the fund management industry here is strong because there are still institutional investors who want and need a better understanding of the benefits of senior loans and what they offer to a diversified fixed income portfolio.”
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