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BKLN: Senior Loan ETF Yielding 5.1% Is A Good Idea Even When Interest Rates Are Falling

Published Sun, 10 Nov 2019 06:45:00 -0500 on Seeking Alpha

Co-Produced with The Belgian Dentist for The Income Strategist

What Are Senior Loans?
Fitch defines a senior loan as a commercial loan to a high-yield company provided by a group of lenders. Other names commonly used are bank loans, leveraged loans or syndicated loans. These loans are typically senior secured debt (secured by the borrowing company’s assets) and are at the top of a company’s capital structure – i.e. they have a first lien on assets in the event of a bankruptcy.
Exhibit 1: Senior loans in the capital structure

Leveraged bank loans are often floating rate and priced at a spread over a referenced rate. They are generally issued with maturities of seven to eight years but can be prepaid sooner without penalty.
There are different views as to why they are termed “leveraged.” One is because of the below investment grade credit quality, another is because they are oftentimes used to fund leveraged buyouts.
Because they are floating rate they have a very short duration. For readers needing a refresher on duration, it is basically the number of years it takes for an investor to be repaid the bond’s price by the expected estimated cash flows. It also measures the sensitivity of a bond’s price to changes in interest rates. Variables the reduce duration are higher coupons, shorter terms to maturity, and floating rates. In times of rising rates, you therefore would prefer to hold shorter duration bonds, while longer duration bonds... Read more