Bank loans, or senior secured loans (SSL), are privately arranged debt instruments issued to institutional investors, providing companies with access to capital. SSLs traditionally offer a fixed spread over an adjustable reference interest rate, making them ‘floating rate’ instruments. They are often used by companies to finance mergers, acquisitions, and leveraged buyouts by private equity sponsors. SSLs are typically rated below investment grade but hold a top-tier position in a company's capital structure, meaning they are prioritised for repayment in case of default. Their floating rate nature, often tied to adjustable interest rates, adds to their appeal, particularly when interest rates are high.
For insurance companies, SSLs can play a key role in enhancing portfolio returns, managing capital efficiently, and maintaining liquidity. They also fit well with insurers' liability structures and can address specific needs in their balance sheets.
In our view, SSLs offer three compelling reasons to invest for insurance companies, particularly in the current macroeconomic environment:
1. High Current Income Potential: SSLs offer a high level of current income due to the combination of base interest rates and wide credit spreads. With interest rates elevated, coupon income for bank loans is currently around 9%, the highest level since 20091. This yield surpasses that of high-yield bonds, which average around 6.24%1. Given market expectations that interest rates will remain high for the foreseeable future, loans provide a stable and consistent income source across various economic conditions.
2. Minimal Interest Rate Risk: SSLs have virtually no duration risk, meaning their value is not heavily impacted by changes in interest rates. This is crucial in a high-rate environment, where other fixed-income instruments may see losses. With an average duration of 45 days, SSLs are well-suited to periods where rates are expected to stay high or even rise further. The forward Secured Overnight Financing Rate (SOFR) curve suggests rates will hover around 5% over the next year, reflecting market expectations of a cautious approach from the Federal Reserve on future rate cuts.
3. Compelling Relative Value: Compared to other fixed-income assets, SSLs have offered one of the best yields, while also providing downside risk mitigation through their seniority in the capital structure and being secured by the company’s assets. SSLs have also offered these high yields with virtually no duration risk.
For a deep dive into the sector and our latest outlook, read our paper ‘The Case for Senior Loans’.
[1] Credit Suisse as of June 30, 2024
Investment Risks
The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Senior Loan strategies are particularly dependent on the analytical abilities of their investment manager. Many senior loans are illiquid, meaning that investors may not be able to sell them quickly at a fair price and redemptions may be delayed due to illiquidity. The market for senior loans could be disrupted in the event of an economic downturn or a substantial increase or decrease in interest rates.
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Issued by: Invesco Management S.A., President Building, 37A Avenue JF Kennedy, L-1855 Luxembourg, regulated by the Commission de Surveillance du Secteur Financier, Luxembourg; Invesco Asset Management, (Schweiz) AG, Talacker 34, 8001 Zurich, Switzerland; Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority; Invesco Asset Management Deutschland GmbH, An der Welle 5, 60322 Frankfurt am Main, Germany. EMEA3959828/2024