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Against a backdrop of volatility in credit markets driven by U.S. and global macro events, we think active management in senior loans is critical for both downside risk mitigation and alpha generation.
On June 17, Nuveen’s investment experts Scott Caraher and Coale Mechlin, Co-PMs of Nuveen's liquid senior loan strategy hosted an insightful webinar, moderated by Laura Cooper, Head of Global Macro Credit, to discuss opportunities and risks for the asset class.
Key takeaways:
Resilient performance compared to other fixed income asset classes
- Senior loans have been the best performing major fixed income asset classes over the past five years1, amid elevated volatility in a post-pandemic era. The resilient performance can be attributed to their floating rate nature, in a fed hiking cycle that resulted in high overall yield levels.
- Despite strong returns, there has been dispersion. The lower quality cohort of the market, in many cases those with leveraged buyouts (LBOs) shortly after COVID have struggled with higher borrowing costs. This is a segment where Nuveen has been cautious over the years, largely avoiding in portfolios.
- Overall yields in higher quality areas of the market are paying ~8% and there are opportunities to pick up incremental yield from dislocated names that are still money-good.
Mainstream asset class with broadening appeal
- The senior loan asset class is now $1.5tn2 in size and has gained wide acceptance, not only with retail investors but also with institutions. Recognizing the potential power of the asset class and the liquidity benefit to an overall fixed income portfolio. Comparatively, the European loan market is much smaller (~$350bn3) with lower liquidity and a less diversified buyer base.
Footnotes
- S&P Global Market Intelligence, S&P/LSTA Leveraged Loan Index
- Federal Reserve Economic Data (FRED)
- Credit Suisse/S&P European Leveraged Loan Index
Information on Risk
Past performance is no guarantee of future results. All investments carry a certain degree of risk, including the loss of principal, and there is no assurance that an investment will provide positive performance over any period of time. Investment objectives may not be met. Derivative instruments for hedging purposes or as part of the investment strategy may involve risks such as liquidity risk, interest rate risk, market risk, credit risk, or management risk. There is no guarantee that the use of these instruments will succeed in mitigating volatility and interest rate risk. Any investment in collateralized loan obligations or other structured vehicles involves significant risks not associated with more conventional investment alternatives.
Credit risk may be heightened for the portfolios that invest a substantial portion of their assets in "high yield" debt or loans with low credit ratings. These securities, while generally offering higher yields than investment-grade debt with similar maturities, involve greater risks, including the possibility of interest deferral, default or bankruptcy, and are regarded as predominantly speculative with respect to the issuer's capacity to pay dividends or interest and repay principal.
The London Interbank Offered Rate or LIBOR, is used throughout global banking and financial industries to determine interest rates for a variety of financial instruments (such as debt instruments and derivatives) and borrowing arrangements. The United Kingdom’s Financial Conduct Authority has undertaken a multi-year phase out of LIBOR. As a result, the administrator of LIBOR ceased publishing certain LIBOR settings after December 31, 2021 and expects to cease publication of all settings after June 30, 2023. The transition away from LIBOR may involve, among other things, increased volatility or illiquidity in markets for instruments that currently rely on LIBOR, such as floating-rate debt obligations. Libor risk is assessed quarterly in arrears.
Issuers of high yield securities may be highly leveraged and may have fewer methods of financing available. The prices of these lower grade securities are typically more sensitive to negative developments, such as a decline in the issuer's revenues or a general economic downturn, than are the prices of higher grade securities. The secondary market for high yield securities may not be as liquid as the secondary market for more highly rated securities, a factor which may have an adverse effect on a portfolio's ability to dispose of a particular security. There are fewer dealers in the market for high yield securities than for investment grade obligations. The prices quoted by different dealers may vary significantly and the spread between the bid and ask price is generally much larger than for higher quality instruments. Under adverse market or economic conditions, the secondary market for high yield securities could contract further, independent of any specific adverse changes in the condition of a particular issuer, and these instruments may become illiquid. As a result, a portfolio could find it more difficult to sell these securities or may be able to sell the securities only at prices lower than if such securities were widely traded.
Nuveen, LLC provides investment solutions through its investment specialists, including Nuveen Asset Management, LLC.
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ESG integration incorporates financially relevant ESG factors into investment research in support of portfolio management for actively managed strategies. Financial relevancy of ESG factors varies by asset class and investment strategy. Applicability of ESG factors may differ across investment strategies. ESG factors are among many factors considered in evaluating an investment decision, and unless otherwise stated in the relevant offering memorandum or prospectus, do not alter the investment guidelines, strategy or objectives.
