Since 2000 the share of US loans rated B and below has more than doubled and now accounts for 57% of the total loan market. In contrast, the weight of HY bonds rated B and below has almost halved to 33%, partly due to the recent rise of “fallen angels” (IG bonds downgraded from BBB to BB) and the upgrades of formerly stressed commodity sector issuers (e.g. from B to BB).
Out of the B and below rated loans, half are assigned a B- rating. Their prices tend to be more volatile because CLO managers, one of the largest loan investors, have limits on CCC-rated positions and actively offload their B- holdings in case of downgrade risks.
However, this general increase in risk of US loans compared to US HY bonds has also led to a higher income on loans relative to HY bonds. The current average yield of 10.2% for US loans (versus 8.9% for US HY bonds) illustrates their higher risk/return profile.
