Leveraged Loan

Parent term

Leveraged Loans are floating-rate, secured loans typically made to speculative-grade borrowers.

Leverage Loan Characteristics
  • Often have no call protection
  • Often have no covenants
  • Often made to speculative grade borrowers (higher rates, but higher default risk)
  • High-quality borrowers often will call their loans early to reset to lower rates, while underperforming borrowers will default
  • Considered by some to be one-sided in favor of the issuer
  • The yields commonly float with Libor - they do well when rates are rising
  • Often considered to be free from interest-rate risk because the yields float
  • Are more senior than bonds in the capital stack - less default risk
Difference Between Leveraged Loans & Bonds
  • Loans are normally secured by a specific assets
  • Most bonds are unsecured

Leveraged Loan Reporting

  • Loan borrowers typically report financials & projections monthly to lenders (vs. quarterly for most public companies)
  • This give leveraged loan asset managers an information leg up against investors without access to this information

2018 Specifics
  • A high % ofleveraged loans circa late 2018 do not have basic convenant protections - this is added risk
  • Historically were issued by banks and kept on balance sheet
  • Circa 2018 they have been included in public bond funds and bond ETFs

Leveraged Loan Risks

  • The floating feature could trigger defaults if rates rise