Leveraged Loan

• Called leveraged loans because the borrowers are leveraged
• Leveraged loans managed to do well through the 2007-2009 financial crisis
• Popular way to finance private equity deals and mergers

• Often have no call protection
• Often have no covenants
• Often made to speculative grade borrowers (higher rates, but higher default risk)
• High-quality borrowers often will call their loans early to reset to lower rates, while underperforming borrowers will default
• Considered by some to be one-sided in favor of the issuer
• The yields commonly float with Libor - they do well when rates are rising
• Often considered to be free from interest-rate risk because the yields float
• Are more senior than bonds in the capital stack - less default risk

• Loans are normally secured by a specific assets
• Most bonds are unsecured

Leveraged Loan Reporting

• Loan borrowers typically report financials & projections monthly to lenders (vs. quarterly for most public companies)
• This give leveraged loan asset managers an information leg up against investors without access to this information

• A high % ofleveraged loans circa late 2018 do not have basic convenant protections - this is added risk
• Historically were issued by banks and kept on balance sheet
• Circa 2018 they have been included in public bond funds and bond ETFs

Leveraged Loan Risks

• The floating feature could trigger defaults if rates rise