Yields on first lien private loans have reached their highest levels since 2008 during the Great Financial Crisis and remain attractive relative to broader private loan market as well. For illustration, first lien yields on one of Alpinum’s representative portfolio in USD are now exceeding 11% p.a. (or ~7.5% hedged in CHF). Rising risk free rates have undoubtedly been the major driver of yield increases on first lien loans as well as on the broader loan market.
Relative attractiveness of first lien stems predominantly from their downside protection of capital invested, compared to junior debt for example. In case of default, first lien loans have historically exhibited materially higher recovery rates than junior debt. With yield premium between junior and first lien loans compressed significantly, compared to historical levels, an investor in first lien portfolio is giving up only a relatively small extra yield potential in exchange for obtaining a significantly higher downside protection ahead of an uncertain phase of economic cycle.