Home / Alternatives / Getting clear on senior secured loans, without the myths

The contemporary notion of senior secured loans needs to be updated to reflect some of the inherent characteristics that make it one of the fastest growing asset classes in markets.

Every asset class has an immediate association, a first impression that sticks in investors’ collective minds and potentially lingers, rightly or wrongly, as its hallmark. Equities are risky, for example, while bonds are boring. For senior secured loans, which exist in the private credit world, the knock is opacity.

Yet the myths that are sometimes associated with senior secured loans are mostly just legacy impressions that don’t really apply in the contemporary sector. As private markets have become one of the most popular alternative asset fields in recent years, the truth is that private credit has changed, and the information about the sector is more readily available than it has ever been.

Gerard Fogarty, managing director of Invesco’s global private credit team and an experienced private markets debt investor, went to work dispelling a few of these myths recently with host Owen Raszkiewicz on The Australian Investors podcast.

The first thing to note is scale, he explained. The loans are large, and they’re well considered with robust origination. In Invesco’s case, the companies they provide Senior Secured Loans (SSLs) to have an EBITDA of “$400 million to $500 million” with an enterprise value multiple of ten times that number. “So you’re talking about $4 billion to $5 billion companies,” Fogarty said.

“The loans we provide to those companies are in the $2 billion range and those loans are made for mergers and acquisitions, for leveraged buyouts, capital expenditures and other funding needs that they’ve got,” he explained.

The other myth to be dispelled is that SSLs lack liquidity. In the modern game, private credit providers have found ways to give investors access to their investment capital in ways that they never could before.

“Those loans trade on a daily basis,” he said. “They’re liquid, so we can trade our individual holdings on a daily basis and more importantly we can provide our investors with daily liquidity so you can invest in the asset… and you can redeem at any time.”

Something additional that investors often forget, Fogarty added, is that SSLs sit at the top of the capital stack, and therefore the loans are the first to get paid back in the event something goes wrong.

“One of the hallmarks of our asset class is that it’s senior and secured, as opposed to high yield bonds which are generally unsecured, so we’re the first to be repaid in the event of a default,” he said, adding that the loans are also floating rate, adjusted on a daily basis, which means the loans are less sensitive to interest rate fluctuations.

According to Kev Toohey, partner at Melbourne-based investment consultancy Atchison, the added security of being at the top of the capital stack helps to balance risk within a broader portfolio of assets. It’s a feature that hasn’t always been appreciated, he adds.

“There has, in the past, been some misunderstandings with what SSLs are and how they operate, but that seems to be clearing up now,” Toohey tells The Inside Adviser. “They aren’t without risk – no investment is – but on a risk/return basis they can offer a lot of portfolio utility if they have liquidity because they do sit high in the capital stack over specific assets – and supplement the majority of fixed interest portfolio exposures that are typically unsecured in nature.”

As the misconceptions around SSLs come to light, Fogarty believes, they are increasingly becoming a common sleeve in the portfolios of investors. And while the bulk of the market is institutional, a growing share of it is also finding its way into the hands of everyday retail and wholesale investors.

“We’re talking about a $1.6 trillion market but about 5 per cent of that, about $75 billion, is individual investors,” he said.