After a difficult 2022, first lien syndicated loans have been generating exceptional performance so far this year, returning 8.5% YTD as of August. Thanks to floating-rate coupons and consequently short duration, the senior first lien loans have benefited from rising benchmark rates. They have also outperformed fixed-rate HY bonds, which have exhibited higher return volatility, partly due to their longer duration, i.e. sensitivity to rate changes throughout the year, mainly in 2- to 5-year tenors.
In terms of credit spreads, at 495 bps discount margin, the first lien loans are still priced roughly 130 bps cheaper than HY bonds. While this is partially caused by lower average rating, large portion of syndicated loans remain cheaper also within identical double- and single-B rating buckets. Among the reasons are liquidity premia and slightly higher near-term default rates expected by the market.
Active credit portfolio management and understanding of quality of creditor protection are key to successfully navigate current loan market. An effect of lower creditor’s protection on portfolio is evidenced by underperformance of subordinated second lien loans (-1.3% YTD loss).
Read more in our Alternative Credit Letter