Resource Logo

Hello, you are using an old browser that's unsafe and no longer supported. Please consider updating your browser to a newer version, or downloading a modern browser.

Receive Updates

In 3 Points: Active Credit Investing in Today’s Markets

Today’s credit markets are like swimming in Hawaii’s warm Pacific waters: they can bring a smile to your face one minute, and put you eye-to-eye with sharks the next.

There’s a lot to like – the potential for higher yields, along with interest rate and principal protection. In particular, senior loans are typically secured with underlying collateral, and sit first in line when lenders line up for repayment. This gives investors some protection if the borrower goes belly up. They also performed well relative to most other assets in 2018.

Yet, dangers persist, including an increased dispersion in credit quality and the continued obstacles facing loan assets across the risk spectrum. Don’t be lulled into a false sense of security, passively lounging in what could quickly become shark-infested waters. Consider that the search for yield may require an actively managed process to help discern which corporate borrowers are worth the risks.

Loan market is expanding, taking on more risk

Loan investors haven’t just dipped their toes into the loan market, they’ve jumped in feet first. And the water has been relatively fine, with senior loans returning 0.44 percent in 2018 compared to 0.01 percent for U.S. corporate bonds and -4.38 percent for equities.1

But the loan market has also been as crowded as the local pool on Labor Day weekend. It hit $1.49 trillion in 2018, and highly leveraged loan deals now account for roughly half of all new U.S. corporate debt issuance.2

Collateralized loan obligations (CLOs) have re-emerged as the main buyer of bank loans over the last six years, acting as a catalyst for growth. They now hold almost two-thirds of the market, with increased demand from loan mutual funds that experienced strong fund flows in response to rising rates.

This expansion has brought on two core challenges. According to JP Morgan, covenant-lite loans have increased from 20 percent of the market in 2008 to 80 percent today. Loans with loan-only capital structures have also increased from 59 percent to 70 percent. These two structural shifts have diluted investor protections and increased credit risk. However, it’s important to put it in context. During the 2008 financial crisis, collateralized loan obligations (portfolios of leveraged loans) realized a loss rate of just above one percent compared to nearly 40 percent in the broader finance market.3

High yield market is shrinking, becoming more conservative

Elsewhere in the credit markets, new high yield issuance is as low Cape Cod’s beach activity on a late January morning. New issue volume sunk to its lowest level since the fall-out from the great financial crisis (GFC) in 2009. Total 2018 volume through December 11 sat at $187.4 billion, a 43 percent year-over-year decrease from the same time period in 2017.4

Leveraged credit opportunities in the right hands

Active management means guiding you from point A to point B before the sharks catch you napping. We believe today’s loan market is structurally sound. Its historical consistency, while not a forecast for future results, has been impressive with a positive return in 18 of the last 20 years.3 Senior loans also pay floating-rate interest that typically reprices every three months, an important characteristic in a dynamic interest rate environment.

Default rates remain historically low across the leveraged credit markets, with Moody’s projecting defaults in high yield credit falling to 1.7 percent by mid-2019.5 Revenues at the borrowers in the S&P/LSTA Leveraged Loan Index have grown at double-digit rates for the last four quarters, and these companies on average have the highest ratio of cash flow to interest payments since at least 2001.3 And most borrowers aren’t on the clock to refinance, with just four percent of outstanding loans due to mature within the next two years.3

Active managers may look to high yield bonds to remove interest rate uncertainty while capturing a yield nearly three times the 10-year Treasury. In the loan market, a focus on first-lien senior loans will continue to ensure higher recovery rates on average than unsecured, high yield debt. Loans with hard assets as collateral and a sound capital structure that includes a subordinated debt cushion may continue to offer outsized return potential with low duration – an attractive combination in this investment environment.

While the assets are important, it’s those managing them that may help move your fixed-income portfolio to calmer waters, which for most investors, is exactly where you want it.

1 Bloomberg. S&P/LSTA Leveraged Loan Total Return Index (Senior Secured Loans), Barclays U.S. Aggregate Total Return Value Index (U.S. Corporate Bonds), S&P 500 Total Return Index (Equities). 1/1/18-12/31/18.

2 MarketWatch. Leveraged Loans are in unchartered territory and that’s a big risk Moody’s says. 1/27/19.

3 Financial Times. Do leveraged loans pose a threat to the U.S. economy. 2019.

4 J.P. Morgan. 2018 High-Yield Annual Review. 12/20/18.

5CNBC. More cracks are appearing for leveraged loans that helped cause the financial crisis. 1/29/19.

Resource Securities LLC, Member FINRA/SIPC.

The information contained herein is intended to be used for educational purposes only and does not constitute an offer to sell or a solicitation to purchase securities. Such offers or solicitations can only be made by means of a prospectus. Prior to making any investment decision, you should read the applicable prospectus carefully and consider the risks, charges, expenses and other important information described therein. The value of your investments may decline, and you could lose some or all of your investment. The prospectus can be obtained by contacting your financial advisor or by visiting our website at www.ResourceAlts.com.

Resource has two interval funds that are distributed by ALPS Distributors, Inc. (ALPS Distributors, Inc. 1290 Broadway, Suite 1100, Denver, CO 80203). Resource Real Estate, LLC, Resource Alternative Advisor, LLC, their affiliates, and ALPS Distributors, Inc. are not affiliated.

Receive Updates

* These fields are required.

Emails will only be sent to financial advisors. If you are not a financial advisor, please visit our website often for the latest educational content.

Resource is the marketing name for Resource Real Estate, LLC, Resource Alternative Advisor, LLC, and their affiliates. Resource may distribute certain products through Resource Securities LLC, a wholly owned broker/dealer, Member FINRA/SIPC

 

The information contained herein does not constitute an offer to sell or a solicitation to purchase securities. Such offers or solicitations can only be made by means of a prospectus. Prior to making any investment decision, you should read the applicable prospectus carefully and consider the risks, charges, expenses and other important information described therein. The value of your investments may decline, and you could lose some or all of your investment. To obtain a prospectus containing this and other information, please call (866) 773-4120 or download the file from www.ResourceAlts.com. Read the prospectus carefully before you invest.

 

Resource has two interval funds that are distributed by ALPS Distributors, Inc. (ALPS Distributors, Inc. 1290 Broadway, Suite 1100, Denver, CO 80203). Resource Alternative Advisor, LLC, Resource Real Estate, LLC, their affiliates, and ALPS Distributors, Inc. are not affiliated.

 

Performance data quoted represents past performance. Past performance is no guarantee of future results and investment returns and principal value of the Fund will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be higher or lower than the performance data quoted above. For performance information current to the most recent month-end, please call toll-free (866) 773-4120 or visit www.ResourceAlts.com.

 

All statements and information other than statements of historical fact included on this website regarding strategy, future operations, financial position, estimated revenues, projected costs, prospects, plans and objectives of management are forward-looking statements. When used on this website, the words “could,” “believe,” “anticipate,” “intend,” “estimate,” “expect,” “project” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain such identifying words. You should not place undue influence on these forward-looking statements. Although we believe that our plans, intentions and expectations reflected in or suggested by the forward-looking statements we make on this website are reasonable, we can give no assurance that these plans, intentions or expectations will be achieved because of the number of risks and uncertainties, many of which are beyond our control, including but not limited to uncertainties concerning the properties being operated and sold or refinanced, leverage and meeting debt service obligations, operating properties in different locations throughout the U.S., general, market or business conditions and changes in laws or regulations. These cautionary statements qualify all forward-looking statements attributable to us or persons acting on our behalf. To check the background of Resource Securities LLC or any registered individual, please go to FINRA’s BrokerCheck.