Money managers that run senior secured loan strategies are poised for a spike in business as institutional investors seek protection from rising interest rates.
Until recently, plan sponsors largely overlooked these strategies as too small or illiquid for a meaningful allocation. But growth prospects have become huge, especially as more investors consider alternatives to asset classes such as high yield, money managers said.
Senior secured loans are corporate bank loans of below-investment-grade issuers with floating interest rates generally based on LIBOR. The loans are typically senior secured obligations. They are considered an attractive investment option because they're secured and because of the floating rate structure, low price volatility and lack of correlation with other asset categories. Collateralized loan obligations are funds that invest in senior secured loans as collateral.
The $13.3 billion San Francisco City & County Employees Retirement System is exploring bank loans as an alternative to Treasury inflation-protected securities because of the difference in spreads, said Clare Murphy, executive director.
The senior secured loan market — or leveraged and high-yield loans — has more than doubled in size since 2000. Institutional investors held a total of $242 billion in senior secured loans as of Oct. 31, according to data from Standard & Poor's, New York. That's up from $193 billion as of Dec. 31 and $117 billion at the end of 2000. S&P did not have growth projections.
"The rising interest rates are adding fuel to the fire and really forcing people to look" at the senior secured loan marketplace, said Jack Yang, partner at Highland Capital Management LP in New York