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Senior loans look particularly attractive amid rising rates

Senior loans look particularly attractive amid rising rates

Senior loans are becoming more attractive than investment grade bonds as well as high yield bonds in a rising rate environment, according to Jeff Bakalar, group head and chief investment officer for senior loans group at Voya Asset Management.

Amid a rising rates environment, there are concerns that investment grade bonds are losing a lot of value and potentially lose more when rates continue to rise.

Investors in a fixed rate high yield bond portfolio, meanwhile, are concerned about the rising rates and its impact of the valuations of bonds.

Unlike high yield bonds, senior loans give investors higher coupon when the rates rise, and its value do not move in inverse direction with the interest rates.

Senior loans as an asset class is starting to get more traction for Asian-based US dollars investors amid rising rates, Bakalar said, adding that most Asian investors are US dollars based investors. 

Voya offers NN (L) Flex Senior Loans fund to high-net-worth investors (HNWIs) in Singapore and Hong Kong. The fund, which was incepted in 2005, has about $5.5 billion assets from private banks, in which close to $200 million is derived from Asia.

Bakalar said European investors are the biggest investor base for Voya’s senior loans fund for now.

Another important differentiation between the two is senior loans are secured by the companies assets, while high yield bonds are not.

As the probability of defaults are higher for below investment grade investing than investment grade, senior loans are preferred over high yield bonds as the former provides substantially higher recovery to that original face value when there’s a default.

Both senior loans and high yield bonds are attractive from yield perspective, given that they invest in below investment grade companies and same types of underlying issuers from profile perspective.

However, their different structure means they perform well in a different environment.

Franklin Templeton is another manager that offers senior loans funds in Asia. It offers Franklin Floating Rate fund and Franklin Upper Tier Floating Rate fund to HNWIs in certain countries in Asia.

Incepted since 2000, Franklin Floating Rate fund had about $1.72 billion in assets as of end-March. Meanwhile, the Franklin Upper Tier Floating Rate fund was incepted since 2014 and had about $1.66 billion in assets as of end-March. 

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