BNY Mellon Investment Manager Sees Yield Opportunity in Secured Bank Loans
LONDON and NEW YORK, August 25, 2011 — Secured bank loans remain attractive to investors as they have the potential to deliver absolute returns in the high single digits and provide inflation protection through a floating interest rate, according to a recent paper from Alcentra*, entitled Investing in Debt: Opportunities in Secured Bank Loans.
"Recent market volatility has caused a dip in secondary prices for loans, offering investors an improved entry point and the opportunity for capital gains," said Simon Perry, managing director of business development for Alcentra and the co-author of the report.
The paper updates a June 2010 report from Alcentra that observed that these loans were poised to deliver highly favorable risk adjusted returns. The current report, published in August 2011, notes that the secondary market prices for these loans have increased; yet investors have yet to return to investing in the secured loan market on a levered basis.
"We consider terms for new deals to present an opportunity for attractive potential returns and give lenders protection through security, leverage and covenant packages," said Paul Hatfield, chief investment officer of Alcentra and the other co-author of the report.
Secured loans are essentially debt originated by banks to finance ventures such as private equity sponsored leveraged buyouts (LBOs). The loans offer direct secured exposure to corporate credit, an easily understood asset class. Companies are turning to the secured loan market as they find access to the high yield bond market restricted, due to heightened perceptions of global risk and a desire to shorten duration, according to the report.
Secured loans present a higher expected recovery rate than high-yield bonds in the event of default and generally are secured by the operating assets of the borrowing company, according to the Alcentra study. Consequently, the study concluded that price volatility in the secondary market is lower for secured loans than for high yield bonds even though both forms of debt are issued by similar sorts of businesses.
"Secured loans are less sensitive to rises in interest rates than high yield bonds because secured loans are a floating rate asset class," said Perry. However, he cautioned, "Investors in secured loans will need to be selective in order to participate in the loans that will be successful and provide the best returns."
The study is available at bnymellonam.com.
Alcentra is an asset management and investment group focused on sub-investment grade debt capital markets in Europe and the United States. The group has an investment track record that dates back to 1998 and spans across 43 separate investment funds totaling approximately $17 billion. Alcentra is 95.5 percent owned by BNY Mellon and 4.5 percent owned by the employees.
BNY Mellon Asset Management is one of the world's leading asset management organizations, encompassing BNY Mellon's affiliated investment management firms and global distribution companies. Information about BNY Mellon Asset Management can be found at www.bnymellonam.com.
BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 36 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, offering superior investment management and investment services through a worldwide client-focused team. It has $26.3 trillion in assets under custody and administration and $1.3 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.7 trillion per day. BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). Additional information is available at www.bnymellon.com and through Twitter @bnymellon.
*'Alcentra' refers to both Alcentra Limited and Alcentra NY, LLC. Assets under management include assets managed by both companies. Only Alcentra NY, LLC, offers services in the US. All information source BNY Mellon Asset Management as at June 30, 2011. This press release is qualified for issuance in the UK and US and is for information purposes only. It does not constitute an offer or solicitation of securities or investment services or an endorsement thereof in any jurisdiction or in any circumstance in which such offer or solicitation is unlawful or not authorised. This press release is issued by BNY Mellon Asset Management (US) and BNY Mellon Asset Management International Limited (ex-US) to members of the financial press and media and the information contained herein should not be construed as investment advice. Registered office of BNY Mellon Asset Management International: BNY Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England no. 1118580. Authorised and regulated by the Financial Services Authority. BNY Mellon Company(SM)