Opportunities in senior secured loans remain as technical drivers diverge

Credit Fund Management analysis


  • Senior secured loans offer attractive absolute value in both Europe and the US.
  • Technical drivers have diverged in the European and US loan markets. Market technicals in Europe are enhancing absolute returns whilst technicals in the US are supporting further compression.
  • European loans benefit from the structural pricing discipline of Collateralized Loan Obligation (“CLO”) managers as CLO AAA spreads are widening, thereby requiring a wider spread on loans.
  • US loans benefit from spread compression, supported by strong technical demand from robust CLO new issuance and retail inflows.
  • Globally, rating agencies are unwinding the flood of pandemic driven downgrades that left many loans mispriced. This positive rating migration unlocks demand for loans from rating-sensitive CLO buyers.
  • Loans have continued to rally this year as the market has normalised, driven by vaccine deployment and economic reopening. Our base case remains that spreads will continue to compress over the remainder of the year, driven by improving corporate fundamentals and increased cash flow.
  • Although the opportunity set is evolving, senior secured loans continue to offer attractive absolute value. Both European and US loans stand to benefit from positive rating migration and market-specific factors. Temporary technical factors are aligning to enhance the return set for European loans, making them particularly attractive. By contrast, the US supply-demand dynamic has created a strong and persistent backdrop that should drive further compression.
  • Given the broad price appreciation over the last year, a selective alpha-led approach is best equipped to navigate the current environment