Senior secured loans are often used to finance private companies that help drive growth in the American economy. With over $1 trillion1 in senior secured loans outstanding, the asset class may offer an investment opportunity for individuals seeking income and capital preservation. Senior secured loans are differentiated from other fixed income investments through their seniority, security and floating rates.

SENIORITY
SECURITY
RATE

Senior secured loans

(1st and 2nd lien)

Backed by company assets

Floating rate

Subordinated debt

(high yield bonds)

Not backed by company assets

Fixed rate

Equity

n/a

n/a

SENIORITY

Senior secured loans

(1st and 2nd lien)

SECURITY

Backed by company assets

RATE

Floating rate

SENIORITY

Subordinated debt

(high yield bonds)

SECURITY

Not backed by company assets

RATE

Fixed rate

SENIORITY

Equity

SECURITY

n/a

RATE

n/a

Seniority: Investing at the top of a company’s capital structure

Companies can finance their businesses by either borrowing money (issuing debt) or by selling an interest in the company (equity). The combination of debt and equity form a company’s capital structure.

Senior secured loans are generally the first obligations of a company to be repaid in the event of a default. The priority of payment may help protect against principal loss. 

CAPITAL STRUCTURE

Senior secured loans – 1st + 2nd lien Unsecured debt Equity Paid last Paid first

Security: Backed by the company’s assets

Senior secured loans exhibit the highest recovery rate of all corporate securities. In the event that a company cannot repay its loans, lenders may be able to take possession of or sell the company’s assets in order to recover their investment.

Moody’s Investors Service, 1987–2016. 81% 63% 48% 28% Senior secured loans Senior secured bonds Senior unsecured bonds Subordinated bonds ULTIMATE RECOVERY RATES FOR FIXED INCOME INVESTMENTS AFTER DEFAULT 100% 80% 60% 40% 20% 0%

Floating rates: Adjusting to changing interest rates

Senior secured loans typically have floating rates, meaning their interest rates adjust or “float” as market interest rates rise or fall. Therefore, the value of senior secured loans tends to be less impacted by changing interest rates compared to fixed‑rate investments such as corporate bonds.

PERFORMANCE DURING PERIODS OF RISING INTEREST RATES2

Senior secured loans

4.9%

U.S. Treasuries

-7.6%

Corporate bonds

-2.4%

High yield bonds

4.4%

Senior secured loans

4.9%

U.S. Treasuries

-7.6%

Corporate bonds

-2.4%

High yield bonds

4.4%


Investor considerations

Senior secured loans are non-investment-grade assets, and like all investments, there are risks associated with investing in a portfolio of senior secured loans. Below is a description of the primary risks of investing in senior loans. This description is not all-inclusive, and before making an investment in a portfolio of senior secured loans, investors should read and carefully consider the prospectus or other offering document for such an investment.

Credit risk: Credit risk is the risk of nonpayment of scheduled interest or principal payments on a debt instrument. Because senior secured loans are made to non-investment-grade borrowers, the risk of default on interest or principal payments is greater than on debt instruments of investment-grade borrowers. In the event a borrower fails to pay scheduled interest or principal payments on its debt, a portfolio of senior loans would experience a reduction in its income and a decline in market value. Over time, the collateral securing senior secured loans may decrease in value, lose its entire value or fluctuate based on the performance of the portfolio company, which may lead to a loss in principal.

Liquidity risk: Senior secured loans are typically lower-rated and may be illiquid investments. As a result, portfolios invested in senior secured loans may experience difficulties and delays in purchasing or selling senior secured loans, with resulting adverse impacts upon the prices obtained.

Interest rate risk: In the event of a rising interest rate environment, the interest paid by floating rate investments would rise. The value of floating rate investments may decline if the associated interest rates do not rise as much, or as quickly, as market interest rates. As market interest rates fall, the interest paid by floating rate investments would decline.


Learn more:

Watch a video on senior secured loans

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1 Credit Suisse, as of May 31, 2017.
2 Bloomberg, as of March 6, 2017. Indices used: Senior secured loans – Credit Suisse Leveraged Loan Index, which is an index designed to mirror the investable universe of the U.S. dollar-denominated leveraged loan market. U.S. Treasuries – Bank of America Merrill Lynch U.S. Treasury Index, which is an unmanaged index that tracks the performance of the direct sovereign debt of the U.S. government having a maturity of at least one year and less than three years. U.S. bonds – Barclays U.S. Aggregate Total Return Value Index, which measures the investment grade, U.S. dollar-denominated, fixed-rate taxable bond market. High yield bonds – Bank of America Merrill Lynch U.S. High Yield Index, which is comprised of U.S. dollar-denominated below investment grade corporate debt securities publicly issued in the U.S. domestic market. Past performance is not necessarily an indicator of future results. This data is for illustrative purposes only and is not indicative of any investment. An investment cannot be made directly in an index. Total return represents income from regular interest payments and appreciation in market value. Average total return reflects the simple average of the total returns, compounded monthly, for the following periods when interest rates increased more than 50 basis points: 1/28/94–5/9/94; 8/17/94–11/7/94; 7/7/95–8/23/95; 1/31/96–6/28/96; 9/30/98–1/21/00; 11/7/01–4/1/02; 6/13/03–9/2/03; 3/22/04–6/14/04; 6/27/05–6/27/06; 3/17/08–6/13/08; 12/30/08–6/10/09; 11/30/09–4/5/10; 10/8/10–2/8/11; 9/22/11–10/27/11; 1/31/12–3/19/12; 7/24/12–9/14/12; 5/1/13–12/31/13; 1/30/15-6/10/15; 7/8/16–3/6/17.