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    Insight’s leveraged loans strategy: A credit opportunity

    Insight’s leveraged loans strategy: A credit opportunity

    13 April 2023 Fixed income
    Leveraged loans have plenty of features that investors may consider to be attractive, including the higher yield levels that prevail and the current potential for capital appreciation. Insight’s long-standing capability in managing loans and its strategy track record may allow investors a way to capture benefits that we believe the loans market currently offers.

     

    Why consider loans now?

    • Security: Leveraged loans are classified as secured First Lien instruments. This means that a loan investor has first claim on the company’s assets and cashflows in the event of a default, which can help lower the risk of principal loss versus other asset classes.

    • Structural seniority: Loans sit higher up the seniority profile for a corporate borrower than other borrowing such as standard issue bonds.

    • Yield: Yields have now increased to levels that investors may regard as more attractive and capable of delivering the income or returns they may be targeting.  

    • Improved potential for capital appreciation: There is the potential that improved market conditions may permit yields to decline once more, and average loan prices could increase, thus introducing the potential for some modest capital appreciation.

    • Growing asset class: The European leveraged loan market has grown significantly in recent years. It has evolved into a highly liquid and tradeable market.

    • Absence of an imminent debt wall: Lenders may be comforted and encouraged by the knowledge that borrowers have been active in recent years, extending and spreading the maturity of their debt.

    • Higher levels of interest coverage: The number of times interest payments are covered by earnings before interest and taxes (EBIT), has risen.

    • Manageable expected default rates: The experience of defaults in the European leveraged loan market has declined since the Global Financial Crisis. We expect defaults to rise only gradually in the years ahead but remain low by historical standards.

    • Attractive risk/reward characteristics: The risk/reward that can be achieved from investing in loans relative to other asset classes can be attractive. The level of yield they typically provide compares favourably with, and frequently exceeds, that of high yield markets, while their floating rate nature can help to keep the volatility of those returns lower than for fixed rate instruments.

    Insight’s strategy
    As part of a conservative investment approach, we seek to accompany generating attractive returns with achieving a low volatility of those returns. As we are not attempting to outperform a benchmark index, we are free to selectively invest where we see value and where we believe the business fundamentals of the issuer are solid, to best ensure repayment of the funds we invest.

    In managing the leveraged loan strategy, we typically aim to focus on selecting issuers which have defensive properties and visible cashflows.

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