Senior Loans Strategy
Combining returns with lower volatility through senior secured corporate debt
Senior Loans offer returns with a lower volatility profile and very low interest rate duration. This rather unique combination of features is valued by many investors, who agree with our manager’s saying: “Slow and steady wins the race!”
Senior Loans are bank loans extended to sub-investment grade corporate borrowers, syndicated and made available to investors. They offer several distinct structural advantages to investors:
- Senior ranking in the capital structure of companies
- Secured by company assets, a so called “safety package”
- Floating rate coupons increase when interest rates rise, keeping duration low
Sample Capital Structure
A senior ranking in the capital structure means that in case of a default, Senior Loan investors will be paid back first and before other lenders, like for instance those of subordinated debt. Due to the “safety package” it is easier for Senior Loans investors to recover their investments should a default happen. Thus, the structural features of Senior Loans are seeking to reduce the risk for the investor.
As their coupons are floating, Senior Loans show very low duration or interest rate risk. Whereas traditional fixed income assets generally decline in value when interest rates are rising, Senior Loans benefit as their coupon payments are adjusted upwards in line with short-term rate increases.
Senior Loans can help diversify portfolios as their distinct features result in low or even negative correlations to traditional assets classes like equities and bonds.
The J. Safra Sarasin Group has developed a strong platform in Senior Loans with assets of around USD 1 billion and including strategies for the US as well as the European loan market
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