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Busting senior secured loan myths with Invesco’s best and brightest

Contrary to popular misconception, senior secured loans actually sit at the safest part of the capital structure and remain backed by company assets. That they're unsafe is one of several fallacies that needs to be busted, says Invesco's Ashley O'Connor.
Investing 101

While senior secured loans have been around since the 1980, and the loans market now exceeds US$2 trillion in size, the sector remains beset my misunderstanding. But as investors learn more about what the associated products are, and what they really aren’t, they are increasingly reaping the benefits according to the team at Invesco.

Speaking on stage to open The Inside Network’s Investment Leaders Forum in Byron Bay recently, Invesco senior portfolio manager Kevin Egan and managing director Ashley O’Connor detailed some of the myths that have been holding investors back, and the truth that’s starting to set them free.

Senior secured loans (SSLs), otherwise known as bank loans or floating rate loans, are short-term debt obligations issued by private and public corporations. And while these loans are typically made to companies that have below-investment grade credit ratings, that doesn’t make them unsafe according to O’Connor.

  • “To bust this myth, senior secured loans are actually at the absolute safest part of the capital structure and backed by the company’s assets,” O’Connor explained. “This is in contrast to shares, which are at the riskiest end of the capital structure, often referred to by debt managers fondly as the first loss piece.

    “As a senior secured loans investor, even if a complete company defaults you still get about 60 to 70 cents in the dollar back, which is more than double the recovery rates of subordinated unsecured bonds. I would argue with that with recession risks rising, there’s never been a better time but to be the safest part of the capital structure.”

    Another myth, O’Connor explained, was that traditional bonds earn a satisfactory yield for investors. “We’ve heard a lot this lately, you know… ‘if I can get 5 per cent from investment grade, maybe that’s enough’,” he said. “I don’t think. So for a retiree in an inflationary environment, the yield on senior secured loans [is] 9.3 per cent, which is more than double the yield on 10 year treasury bonds and 4 per cent higher than the current yield you’re getting on investment grade.”

    On the topic of yield, Egan said worry about elevated income not lasting was another myth that ought to be cleared up.

    “If you’re listening to Chairman Powell, this is not going to be the case,” Egan ventured. “In fact, we think elevated income is going to last for quite some time.”

    The case bears out, Egan explained, as inflation (and wage inflation) in the US, in particular, proves “very persistent”. While forward projections at the beginning of 2024 were suggesting up to half a dozen rate cuts through the year, economists and serious pundits now believe we’re looking at one or two – if any.

    With income on loans already benefitting from high interest rates and reaping around 9 per cent, higher-for-longer can only means good things for SSLs. Even when inflation, and rates, does begin to come down, Egan said, central banks will do so in a cautious manner. Any deflationary turn will be long and slow.

    “Right now, that forward curve would suggest that we’re gonna see rates bottom at four and a quarter percent, only about 100 basis points lower than we are today,” Egan added. “And that’s in 2026.”

    Staff Writer

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