| Leveraged Loan 101 |
|
|
| 21/11/2004 | |
|
As Standard & Poor's Ratings Services launches the first European Leveraged Loan Index (ELLI) offering independent performance benchmark for European loans available to institutional investors, Alan Kerr, a credit analyst and loan portfolio manager at Harbourmaster Capital, answers this week's 101 on leveraged loans. 1-What is a leveraged loan? There are varying definitions, but a leveraged loan is usually defined as a syndicated loan which pays interest at above Euribor + 1.25% per annum. Leveraged loans are generally secured, private instruments. They usually include mezzanine, or second-priority loans. 2- Can it be considered as a full-blown asset class? Why? Leveraged loans are a defined universe of loans, with characteristics which set them apart from other high yield investments, such as high yield bonds. As such, they do represent a separate asset class within the high yield universe. 3- Why should an institutional investor invest in leveraged loans? How much of its portfolio should be allocated to this asset class? Leveraged loans have historically generated attractive risk-adjusted returns, while displaying low volatility compared to high yield bonds. Their floating rate nature provides a hedge against rising interest rates. In addition, leveraged loans display low correlation with other asset classes. Therefore in my view, an allocation to leveraged loans should form part of a diversified credit portfolio. Leveraged loans are getting more attention than ever before from institutional investors, who have contributed to the growth of the market by doubling their share of the market to about 20% over the past three years. There were only 63 credit facilities representing €9.5 billion by par value in January 2003, up to 142 facilities of €18.5 at August 31, 2004. Before the launch of the S&P ELLI, investors had no mean to access independent data provided by a third-party. Using the loan portfolios of key institutional loan investor partners Alcentra Ltd., Harbourmaster Capital Management Ltd., Intermediate Capital Group, ING Capital Management, and M&G Investment Management Ltd., the Standard & Poor's ELLI series tracks the performance on leveraged loans issued to investors in the region that are now providing 20%-25% of primary market liquidity. Secondary market prices for the market value return calculations are gathered from two sources -- the Loan Market Association's (LMA's) weekly valuation survey and the European pricing database of Mark-It Partners/LoanX. |
|
Related articles |
|
Articles of the same Serie : 101 |
|
© Copyright 2008 bfinance. This document is for your personal non-commercial use. Any further copying, reproduction, distribution is strictly prohibited. To obtain permission please contact This e-mail address is being protected from spam bots, you need JavaScript enabled to view it