the Invesco Senior Loan ETF (BKLN) records the second highest average daily volume in Invesco’s ETF lineup. What is driving investors to flock to this senior debt ETF?
The pandemic has put credit bureaus on alert for more potential defaults in a weakened economy, but a new risk is emerging. Climate risk in the form of harsh winters in the United States could pose a solvency problem, which justifies the need for debt investors to be in a senior lending position.
“Climate change has made the world a riskier place,” said one International Monetary Fund Blog article says. “The destruction caused by heat waves, droughts, hurricanes and coastal flooding does not end with loss of life and livelihoods – it can also have serious consequences for a country’s finances.
“Recent IMF staff research discovered that a country’s vulnerability or resilience to climate change can have a direct effect on its creditworthiness, its borrowing costs and, ultimately, the likelihood of defaulting on its sovereign debt, ”said added the blog.
BKLN seeks to replicate the investment results of the S & P / LSTA US Leveraged Loan 100 Index. The fund’s advisor and sub-advisor define senior loans to include loans called leveraged loans, bank loans and / or variable rate loans.
Banks and other lending institutions typically provide senior loans to corporations, partnerships, or other entities. Senior Loans are typically used for business recapitalizations, acquisitions, leveraged buyouts, and refinancings. BKLN’s loan portfolio will include the purchase of loans from banks or other financial institutions through divestitures or participations.
Benefits of investing in senior loans
As the pandemic continues to impose stricter underwriting requirements on borrowers, senior loans are relatively safe. The higher the risk of default for a borrower, the more important it is to hold a position of responsibility.
BKLN may acquire a direct interest in a senior loan from the agent or another lender through an assignment or an indirect interest in the loan by participating in another lender’s share of a loan. BKLN sells portfolio loans by way of assignment, but it can also sell loan stakes in order to fund repayment requests.
The inherent risks associated with senior loans are similar to the risks of junk bonds, but take precedence in the event of borrower default, so if the company is forced to sell its assets in a run-off scenario, the senior loan will be paid first. Additionally, senior loans are asset-backed while junk bonds are not, making them a more attractive investment option when building a loan portfolio.
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