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Date: January 31, 2018
Category: Credit

Fixed-income Investors Must Consider Default Risk [Video]

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Portfolio Manager Resource Credit Income Fund
While default rates remain low by historical standards, investors should consider focusing on assets that offer an additional layer of default protection.
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Investors generally look to fixed-income assets for potential risk-adjusted income. And in today’s rising interest rate environment, investors may be looking at floating-rate assets to help protect their portfolios.

Once the discussion turns to these assets, investors must consider default risk. Default risk is the risk that the borrower will be unable to repay all their interest and all of their principal. If the borrower files for bankruptcy, investors could lose the potential income stream from interest payments, and may not recover their principal. While default rates remain low by historical standards, investors should consider focusing on assets that offer an additional layer of default protection.

For example, senior secured loans enjoy a senior position in the capital structure. They are generally secured by a borrowers’ assets like property and equipment. In the unlikely event of default, these loans have the first claim on the borrower’s assets, making them the least risky investment in the capital structure.

Historical capital recovery rates illustrate this point. Over the last three decades, capital recovery rates have generally been correlated with priority of claim. The higher the priority, the higher the average rate of recovery.

Recovery rates for senior secured loans have been historically much higher than those of more-junior and unsecured loans.

At Resource, we are always looking to provide innovative solutions that meet the needs of today’s investment environment. Fixed-income investors searching for new ways to generate income as rates rise may want to consider senior secured assets to potentially help preserve principal.

Looking for ways to support your fixed-income strategy?

 
This information is educational in nature and does not constitute a financial promotion, investment advice, or an inducement or incitement to participate in any product, offering or investment. It is not intended to be used as a tool to determine your specific financial situation, tax status, investment objectives, investment experience, suitability for any specific investment, risk tolerance or investment profile. Resource is not adopting, making a recommendation for or endorsing any investment strategy or particular security. The materials included herein are the property of Resource and may not be repurposed in a separate likeness without the express written consent of Resource.

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