Portfolio Manager Perspectives

Jeff Benjamin

‘Libor floor’ loans giving good yields, says Hartford’s Bacevich

Manager holds about 200 corporate loans that are paying an average interest rate of 6.25%

Jul 28, 2010 @ 12:38 pm

By Jeff Benjamin

Want to profit from the credit squeeze on cash-strapped companies?

Mike Bacevich, manager of the $4.5 billion Hartford Floating Rate Fund Ticker:(HFLAX) is doing just that by investing in loans made to single-B- and double-B-rated companies.

“In the relatively small community of bank loan investing we are demanding yield for our investors,” he said.

Indeed, Mr. Bacevich’s portfolio currently holds about 200 corporate loans that are paying an average interest rate of 6.25%.

The floating-rate loans are typically pegged to the London Interbank Offered Rate and are considered a way to take advantage of a rising-rate environment because the interest rate on the loans will adjust with the Libor rate. But because these companies seeking the bank loans have no other cash-raising option beyond issuing junk bond debt, the market has forced a rare trend toward what is known as a “Libor floor” loan that essentially turns the floating rate into a higher-yielding fixed-rate loan.

According to Mr. Bacevich, two years ago, there were no Libor floor loans being made, but so far this year, every loan in the category has been written with a fixed minimum rate on top of the Libor rate.

The Libor floor trend is being driven, he said, by an improving economy and the return of liquidity to refinance existing debt.

The current Libor rate is 0.25%, but the current Libor floor is 1.75%. The total loan rate example of 6.25% is calculated by factoring the credit risk.

Historically, Libor-pegged floating-rate loans have had rates that have fluctuated up or down in relation to the Libor rate, but the Libor floor means the rates can adjust higher only when interest rates start to rise. And as rates start to rise, the Libor floor will decrease and eventually become less common.

The biggest risks of these types of loans — as well as the mutual funds that invest in them — are loan defaults.

Keep in mind that these are loans to below-investment-grade companies. But the loans are secured, and the current default rate, on a 12-month annualized basis, is 4%. That compares with November, when the comparable default rate was 10.5%.

For investors, the emergence of the Libor floor loans makes an attractive strategy even more so because of the higher fixed yield.

“Investors have few alternatives when they’re looking at potential rising-rate environment,” Mr. Bacevich said. “They can go to short-duration bonds or floating-rate loans, and while short-duration bonds have a higher credit quality, they also have lower income.”

Portfolio Manager Perspectives are regular interviews with some of the most respected and influential fund managers in the investment industry. For more information, please visit InvestmentNews.com/pmperspectives.

0
Comments

What do you think?

View comments

Most watched

INTV

How advisers can be a gamechanger for women investors

Why women defer to men when it comes to finances and how advisers can combat this phenomenon and make a difference for female investors, according to Heather Ettinger, founder and CEO Luma Wealth Advisors.

INTV

How the 2020 elections could impact ESG investing

Joseph Keefe, president of Impax Asset Management, on the elections and how advisers can build a bridge to the next generation of clients with ESG investing.

Latest news & opinion

Charles Schwab reportedly in talks to buy USAA brokerage, wealth management business

The deal would net Schwab roughly $100 billion in new assets.

Advisers scramble to help retirees navigate looming Fed rate cut

The Fed's first interest-rate cut in a decade has advisers warning against chasing the bait of risk over safety.

CFP Board to announce possible delay of new fiduciary standard

Organization's CEO confirms meeting with Edward Jones, says broker-dealer still considering how to move forward.

Departure of Alexander Acosta could slow DOL effort to revise fiduciary rule

Acting secretary Patrick Pizzella will have to make political decision to move ahead.

SEC member Peirce to brokers: Talk to us early, often about Reg BI implementation problems

She's willing to advocate for additional compliance time if firms have made a good faith effort.

X

Hi! Glad you're here and we hope you like all the great work we do here at InvestmentNews. But what we do is expensive and is funded in part by our sponsors. So won't you show our sponsors a little love by whitelisting investmentnews.com? It'll help us continue to serve you.

Yes, show me how to whitelist investmentnews.com

Ad blocker detected. Please whitelist us or give premium a try.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print