LONDON and NEW YORK, June 3 /PRNewswire-FirstCall/ -- Secured loans are poised to deliver more favourable risk adjusted returns than the market has seen for several years, as new issue spreads widen and leverage falls according to a recent study by Alcentra*, part of BNY Mellon Asset Management.
Secured loans, essentially debt originated by banks to finance ventures such as private equity sponsored leveraged buyouts (LBOs), have become increasingly attractive to investors as security for the lender has improved at the same time as the return on offer has risen.
Secured loans also present a higher expected recovery rate than high-yield bonds in the event of default and are secured by the operating assets of the borrowing company, according to the Alcentra study. Consequently the study concluded that 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.
"Loans are a floating rate asset class and will therefore be less sensitive to rises in interest rates than high yield bonds," said Simon Perry, co-author of the study and Head of EMEA Business Development at Alcentra. Perry added that as loans do not clear through a standardised clearing system, they could be difficult to administer which has contributed to the slow acceptance of secured loans by institutional investors. However he noted, "Over the last 10 years, we have seen the emergence of asset managers specialising in this asset class, making it more accessible."
Paul Hatfield, Global Chief Investment Officer at Alcentra and co-author of the study, added: "Prices for loans in the secondary market have now recovered following the unwinding of excessive leverage.
"Consequently, the unprecedented drop in loan prices in 2008 and 2009 is unlikely to be repeated because most of the overly leveraged investors have been removed from the market." Hatfield cautioned that 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.
David Forbes-Nixon, Chief Executive Officer of Alcentra, commented that while much has been made of the risk of increased defaults posed by the forthcoming "wall of refinancing", in reality borrowers have been swift to address the issue, taking the chance to access the capital market to push out maturities. "Many of these solutions have required the consent of senior lenders, allowing them to push for higher lending margins on existing facilities as well as in the new issue market," Forbes-Nixon concluded.
The study will shortly be available at bnymellonam.com.
*'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 31/03/10. 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
A BNY Mellon Company(SM)
Notes to Editors:
Alcentra's asset management and investment activities are focused on the sub-investment grade debt markets, with offices in London and New York. The group has 56 professionals and almost $17 billion assets under management globally across 43 investment funds. Alcentra is 95% owned by BNY Mellon with 5% owned by Alcentra's management team and employees. Additional information is available at alcentra.com
BNY Mellon Asset Management is the umbrella organisation for BNY Mellon's affiliated investment management firms and global distribution companies.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation (NYSE: BK). BNY Mellon is a global financial services company focused on helping clients manage and service their financial assets, operating in 34 countries and serving more than 100 markets. BNY Mellon is a leading provider of financial services for institutions, corporations and high-net-worth individuals, providing superior asset management and wealth management, asset servicing, issuer services, clearing services and treasury services through a worldwide client-focused team. It has $22.4 trillion in assets under custody and administration, $1.1 trillion in assets under management, services $11.8 trillion in outstanding debt and processes global payments averaging $1.5 trillion per day. Additional information is available at www.bnymellon.com.
SOURCE BNY Mellon