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The lowdown on leveraged loans

For those new to the asset class, leveraged loans are like high yield bonds but with two important differences.

Firstly, leveraged loans have floating rate coupons, meaning they go up and down in line with base interest rates set by central banks. In times when inflation is high and central banks increase base interest rates, investing in floating rate helps to protect their assets.

Secondly, leveraged loans are typically secured and offer greater protection in the event of an underlying company not being able to repay (a ‘default’), whereas most high yield bonds are unsecured and less protected. This effectively means that the owners of leveraged loans are first in line to recover their investments should a company not be able to repay. Historically, leveraged loan investors have seen considerably higher recovery rates than high yield bond investors in the event of a default.

Favourable returns across credit cycles

We are one of the few investment companies where the income is variable and linked to central bank base interest rates. Historically, many investors would typically get their income through fixed rate high yield funds, but these have tended to underperform in a rising rate environment.

CVC Income & Growth Limited (CVCIG) has previously generated attractive returns on its credit opportunities investments. If and when central bank base interest rates start coming down, CVCIG should continue to generate good risk-adjusted returns for investors.