Leveraged Loans: Much More Than an Interest-Rate Call
The Barclays U.S. Aggregate Bond Index is an unmanaged index composed of securities from the Barclays Government/Corporate Bond Index, Mortgage-Backed Securities Index and the Asset-Backed Securities Index. Total return comprises price appreciation/depreciation and income as a percentage of the original investment. Indexes are rebalanced monthly by market capitalization.
The BofA Merrill Lynch U.S. High Yield Constrained Index is a market value-weighted index of all domestic and Yankee high-yield bonds, including deferred interest bonds and payment–in-kind securities. Issues included in the index have maturities of one year or more and have a credit rating lower than BB-/Baa3, but are not in default. The index limits any individual issuer to a maximum of 2% benchmark exposure.
The Credit Suisse Leveraged Loan Index is designed to mirror the investable universe of the U.S. dollar-denominated leveraged loan market. The CS Leveraged Loan Index is an unmanaged, trader-priced index that tracks leveraged loans. The CS Leveraged Loan Index, which includes reinvested dividends, has been taken from published sources.
Indexes are unmanaged, do not reflect the deduction of fees or expenses, and are not available for direct investment.
A basis point (bps) is one one-hundredth of a percentage point.
Collateralized loan obligations (CLOs) are a form of collateralized debt obligations (CDOs), which are financial instruments that pool assets, such as loans, mortgages, and bonds, and issue various classes of securities that are backed by these assets. These classes, or tranches, have a wide range of risk/return characteristics, ranging from ‘AAA’ rated on down to riskier classes, which typically offer greater returns. Higher-rated, or senior, tranches have first priority on the cash flows and, in the event of default, on the collateral. CLOs typically consist of pools of 100 or more corporate loans rated below investment grade. These loans usually have a maturity of seven years and pay a floating interest rate. The coupon rate pays a spread over the London Interbank Offered Rate (LIBOR) that varies with the loan’s credit quality.
Coupon is the interest rate stated on a bond when it's issued. The coupon is typically paid semiannually. This is also referred to as the "coupon rate" or "coupon percent rate."
Leveraged loans are originated by banks and sold to institutional investors, including mutual funds. The loans are made to large corporate issuers, generally of less-than-investment-grade credit quality. Corporations use these loans to fund acquisitions, operations, dividend payments and other strategic initiatives.
LIBOR is an interest rate at which banks can borrow funds, in marketable size, from other banks in the London interbank market. The LIBOR is fixed on a daily basis by the British Bankers' Association. The LIBOR is derived from a filtered average of the world's most creditworthy banks' interbank deposit rates for larger loans with maturities between overnight and one full year.
The Sharpe Ratio is a measure for calculating risk-adjusted return. It represents the average return earned in excess of the risk-free rate per unit of volatility or total risk. Generally, the greater the value of the Sharpe Ratio, the more attractive the risk-adjusted return.
Spread is the percentage difference in current yields of various fixed-income instruments. Spreads are often expressed as a difference in percentage points or basis points (which equal one-one hundredth of a percentage point).
Standard Deviation measures the dispersion of data from the mean. Applied to a rate of return, standard deviation is an indication of an investment’s volatility.
Yield is the annual interest received from a bond and is typically expressed as a percentage of the bond's market price.
A Note about Risk: The value of investments in fixed-income securities will change as interest rates fluctuate and in response to market movements. Generally, when interest rates rise, the prices of debt securities fall, and when interest rates fall, prices generally rise. Bonds may also be subject to other types of risk, such as call, credit, liquidity, interest-rate, and general market risks. High-yield securities, sometimes called junk bonds, carry increased risks of price volatility, illiquidity, and the possibility of default in the timely payment of interest and principal. Moreover, the specific collateral used to secure a loan may decline in value or become illiquid, which would adversely affect the loan’s value. Longer-term debt securities are usually more sensitive to interest-rate changes; the longer the maturity of a security, the greater the effect a change in interest rates is likely to have on its price. Lower-rated bonds may be subject to greater risk than higher-rated bonds. No investing strategy can overcome all market volatility or guarantee future results.
Treasuries are debt securities issued by the U.S. government and secured by its full faith and credit. Income from Treasury securities is exempt from state and local taxes.
The bank loan market may not perform in a similar manner under similar conditions in the future.
Past performance does not guarantee future results. Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts are accurate.
Forecasts and projections are based on current market conditions and are subject to change without notice. Projections should not be considered a guarantee.
The opinions in the preceding commentary are as of the date of publication and subject to change based on subsequent developments and may not reflect the views of the firm as a whole. This material is not intended to be legal or tax advice and is not to be relied upon as a forecast, or research or investment advice regarding a particular investment or the markets in general, nor is it intended to predict or depict performance of any investment. Investors should not assume that investments in the securities and/or sectors described were or will be profitable. This document is prepared based on information Lord Abbett deems reliable; however, Lord Abbett does not warrant the accuracy or completeness of the information.