Problems beings faced by banks in Spain, Portugal and Greece should not unduly worry investors in the general leveraged loan market in the UK and Europe, according to at least one experienced fund manager.
Paul Hatfield (pictured), founder and managing director of specialist senior debt and mezzanine debt manager Alcentra, said this week that sufficient protection existed in the loan portfolio of most good managers.
In fact, the prospect of an environment of rising interest rates presented managers and their investors with new opportunities, he told a Fiduciary Investors’ Symposium in Sydney on 1 June.
London-based Alcentra is an affiliated manager of BNY Mellon Asset Management which has a range of strategies in the corporate debt and generally higher-alpha end of the fixed-interest market.
Hatfield pointed out that Greece, for instance, made up less than 2 per cent of the Eurozone and there were only two recent Greek deals, neither of which his firm was involved with, but both which looked sound anyway.
Hatfield questioned whether equities would be able to deliver steady growth in the medium term and whether government bonds were the risk-free instrument they used to be.
Leveraged loans “or senior debt” and high-yield bonds, which tend to sit in between the two major asset classes on the risk spectrum, provided a number of advantages which were enhanced by the current environment:
- They are secured on the assets of the borrower, and therefore have higher recovery rates
- Similarly, they have lower expected secondary market price volatility
- The covenants put in place by managers should require leverage multiples and interest coverage to be maintained, otherwise the lenders may enforce their security
- They are private instruments
They are floating rate instruments (and therefore do not have duration risk).
Senior secured loans, which are used to finance private equity-sponsored leveraged buyouts, have their own special characteristics. They have a lower volatility than bonds and a different universe of buyers.
Bonds actually had a lower recovery rate than loans, Hatfield said, and their longer duration made them more sensitive to movements in the yield curve.
