Senior loans may not be fully secured by collateral, generally do not trade on exchanges, and are typically issued by unrated or below-investment grade companies, and therefore are subject to greater liquidity and credit risk.
A senior bank loan is a debt financing obligation issued to a company by a bank or similar financial institution and then repackaged and sold to investors. The repackaged debt obligation consists of multiple loans. Senior bank loans hold legal claim to the borrower's assets above all other debt obligations.
Floating rate loans are considered senior debt, meaning they have a higher claim on a company's assets in the event of default. However, the term "senior" doesn't represent credit quality, only the pecking order of claiming a company's assets to pay back the loan if the company defaulted.
Senior debt has the highest priority and therefore the lowest risk. Thus, this type of debt typically carries or offers lower interest rates. Senior debt is most often secured by collateral, also making it relatively less risky.
3 With a recovery rate of 80%, and a historical annual default rate of 3%,4 the historical net credit loss of senior secured loans is a meager 0.6% on average.
For starters, senior loans might be an attractive option for income-seeking investors due to their elevated yield (9.11% yield to worst). As seen in Figure 5, this is the highest yield of all the fixed income asset classes displayed.
Senior loans have higher yields, and faster dividend growth, however. Both have high levels of credit risk. Senior loans have almost no interest rate risk, while high-yield bonds have below-average interest rate risk. Senior loan ETFs tend to be more expensive than high-yield corporate bond ETFs.
You may hear that seniors shouldn't worry about old debts. This is partially, but not completely, true. Many seniors are “judgment proof,” which means their income is derived from retirement, Social Security, or other accounts that can't be garnished.
Moreover, the interest expense owed on senior debt is most often priced at a floating rate against a specified benchmark rate such as SOFR (formerly LIBOR), as opposed to a fixed rate. If interest rates are expected to fall in the near-term future, investors prefer fixed interest rates.
We expect loans will deliver coupon-minus total returns of approximately 8.0% in 2024. Loan market coupon is currently 9.20%, a function of nominal loan spreads at 3.81% and 3-month SOFR at 5.39%. The forward SOFR curve currently implies an average 3-month SOFR rate of approximately 4.88% over the course of 2024.
Floating rates are used by credit card companies and commonly seen with mortgages. Floating rates reflect the market, follow an index, or track another benchmark interest rate. Floating rates are also called variable rates. They're considered riskier than fixed rates.
Senior Secured Loans (SSL) provide investors with an attractive investment opportunity: SSL pay a floating coupon at a premium above a base rate, which translates into a generally limited interest rate sensitivity. By being both “senior” and “secured”, SSL can offer mitigation of downside risk in the event of default.
Relative to most bond categories, senior loans have historically provided increased income, lower duration and low correlation to interest rate changes.
Senior bank loans are also referred to as syndicated bank loans, as a number of them are usually packaged together, and the packaged debt obligation is then sold to investors. The loans are designated as “senior” because they take priority over any other potential debt obligations by the borrower.
As long as your income comes from an acceptable source, it shouldn't prevent you from getting approved for a mortgage. If you receive Social Security income, you can use it to qualify for a mortgage. But whether you'll ultimately be approved will depend on your overall financial situation.
Can a debt collector take my federal benefits, like Social Security or VA payments? Before a debt collector can take Social Security or VA benefits, they must sue you and win a judgment against you for the amount you owe.
In some extreme cases, a judgment may allow a creditor to take all of the money in your bank account. This can happen in instances where you have fully used your exemption on other accounts or assets.
Most seniors gain their income through Social Security, retirement, or other accounts that can't be garnished. Debt collectors cannot touch these sources of income. However, being judgment free doesn't mean debt collectors will automatically forgive all debts.
Federal income retirement benefits are protected from commercial garnishment through the federal Consumer Credit Protection Act. This means Social Security and other federal benefits can't be garnished by credit card companies, for medical bills, and other commercial creditors.
Section 1024 of the Tax Payer Relief Act of 1997 (Public Law 105-30) authorizes the Internal Revenue Service (IRS) to levy up to 15% of each Social Security payment for overdue Federal tax debts until the tax debt is paid.
A common misconception is that you could inherit credit card debt from your parents if you were listed as an authorized user on the account. This is inaccurate. You are only held liable for consumer debt if you applied for the account or the loan with your parents as a co-signer or joint owner.
They trade like bonds in the secondary market, but there are some differences. While senior secured bonds pay fixed coupons, senior secured loans pay floating rate coupons, which are made up of a fixed spread over a moving reference interest rate.
Conventional wisdom holds that when you hit your 70s, you should adjust your investment portfolio so it leans heavily toward low-risk bonds and cash accounts and away from higher-risk stocks and mutual funds. That strategy still has merit, according to many financial advisors.
Senior loans, also known as leveraged loans and often historically called bank loans, refer to the debt instruments at the top of the capital structure.