Leveraged loans consist of senior secured debt obligations that are rated below investment grade (i.e., part of the high yield bond market). The proceeds from leveraged loans are typically used to support mergers and acquisitions deals, recapitalize a company’s balance sheet, refinance existing debt, or for general corporate purposes,such as operations or asset financing. The S&P/LSTA Loan Index, broadly used as a proxy for the US leveraged loan market, totaled roughly US$1.2 trillion at year-end 2020 – more than double the amount of US$497 billion in 2010, when the market was still recovering from the financial crisis of 2007.
The growth of the leveraged loan market over the past decade unfolded against a backdrop of sustained low interest rates, which allowed companies to borrow at a low cost. Continued demand by institutional investors and retail funds/exchange-traded funds (ETFs), and importantly, the expansion of Collateralized Loan Obligations (i.e.,securities that are backed by a pool of loans), have been significant contributors to the rapid growth of the asset class. Today, the leveraged loan market represents a mature asset class with efficient loan trades process, and a deep secondary market with larger transactions.
At Stone Harbor, we believe a core, value-oriented, bottom-up strategy that focuses on credit fundamentals is key to capturing the opportunity set in the leveraged loan market across a range of market scenarios. To that end, our approach emphasizes the following:
- Minimizing credit losses, while capturing the upside from fundamental misvaluations and technical market dislocations
- Focusing on companies that we believe are appropriately capitalized, generate free cash flow over the business cycle, and are in industries with established asset and enterprise values
- Avoiding late cycle downturns from a risk management standpoint, while remaining positioned to capture opportunities from dislocations resulting from credit and industry-specific cycles
- Mitigating downside risk through issuer and industry segment diversification
Stone Harbor has been managing the Leveraged Loans strategy since 2004.
Flexible in addressing client needs, we offer leveraged loans as a stand-alone portfolio or as a component of our High Yield or Multi-Sector Credit strategies.