Syndicated loans deserve a place in your fixed income allocation

For income-focused investors facing a world of elevated rate risk and compressed yields, the challenge is not finding income. It is finding income without the wrong kind of risk attached.

Syndicated loans offer one of the more structurally sound answers to that problem. However, for many Australian advisers and their clients, the asset class remains underutilised. That’s not because it lacks merit, but because syndicated loans are often less familiar than investment-grade bonds, term deposits or listed hybrids.

Richard Quin, chief investment officer at Bentham Asset Management, explains how the trade-off works:

“This investment suits investors seeking a return above bank bill without fixed rate exposure,” he says. “They are taking the current bank bill rate and adding a credit risk premium and that gives them a higher income.”

Understanding the structure

Syndicated loans are arranged by groups of banks to finance large companies, typically for mergers and acquisitions, buyouts or recapitalisation. These loans sit at the top of the capital structure as senior secured, first-lien instruments, meaning lenders have priority claim on assets in the event of default.

Critically, they carry a floating rate. Where investment-grade bonds carry duration risk that can erode capital when rates rise, syndicated loans reset with the prevailing benchmark rate.

For investors who have spent the past three years watching fixed rate portfolios absorb mark-to-market losses, that structural feature is worth understanding carefully.

The market is also larger and more liquid than many Australian investors appreciate. The syndicated loan market trades $3 billion to $4 billion a day globally, though any single fund, including Bentham’s, only ever holds a slice of that broader market.

Unlike private debt, syndicated loans are daily priced and actively traded, giving investors meaningful liquidity that is rarely available in comparable credit strategies.

Credit selection is the discipline that matters

Access to the asset class is one thing. Access to the right borrowers within it is what determines outcomes. For Quin, credit selection is not a preference. It is the whole game.

“Credit selection is critical. You must be highly diversified, but you also have to avoid the losers. That requires deep research and a network of experienced managers in this asset class.”

It is a more demanding standard than it sounds, and the market’s breadth makes it easy to see why. The syndicated loan market spans hundreds of corporate issuers across the US and European markets, ranging from investment-grade adjacent credits to higher-yielding leveraged loans.

Dispersion between winners and losers in any credit cycle is material. A manager without the research infrastructure to distinguish between them is taking on more risk than the yield premium justifies.

Bentham’s SIG team, established in 1997, covers approximately 800 corporate issuers across the US and European markets through 70 investment professionals operating in New York and London, according to the firm. The team has been through multiple credit cycles, including 2008, the COVID-19 disruption of 2020, and the rate volatility of 2022 to 2024.

The income case

For income-focused investors, including retirees and those in the decumulation phase, the track record of the asset class speaks directly to the brief.

The Bentham Syndicated Loan Fund has delivered a consistent income stream for more than 22 years, with returns approximating 7.5 per cent per annum before fees, according to the firm. Monthly distributions have been paid consistently for more than 15 years, and the fund currently yields around 9.1 per cent.

A track record and a current yield are not the same thing, and neither is a guarantee of what the fund returns in the next cycle. That said, the consistency across multiple market cycles is not incidental. It reflects the floating-rate structure of the underlying loans, which means income adjusts upward when rates rise, alongside the senior secured position, which provides a degree of capital protection that subordinated credit instruments do not.

Why structure matters more than the headline rate

Syndicated loans do not eliminate credit risk. They manage it through structure, diversification and selection discipline.

For advisers constructing income portfolios for clients who cannot afford prolonged capital drawdowns, understanding those structural features is as important as understanding the yield number itself.

The asset class is not a substitute for investment-grade bonds or cash. It occupies a distinct part of the credit spectrum, offering higher income in exchange for lower liquidity than listed markets and higher credit risk than government bonds.

Used appropriately, it broadens the income toolkit without materially increasing portfolio volatility.

In a market where private credit has attracted considerable new capital and managers of widely varying quality, cycle experience and research depth are among the most defensible criteria an adviser can apply when assessing credit managers. The difference between a manager who has seen defaults and one who has not will matter most when conditions deteriorate.