Leveraged Loans
Investment Principles
Goal:
- Generate competitive risk-adjusted returns
Highlights:
- Targeted Universe—Mainly BB & strong B rated assets
- Income Focus—Stresses principal preservation
- Strict Credit Discipline—Active monitoring of issuers and covenants
- Leverage High Yield Experience—Adds alpha to leveraged loan returns
Investment Process
We have long-standing processes for investing in leveraged loans that have served our clients over many business and credit cycles.
Targeted Universe
- Focus on BB and B-rated loans
- Liquid issues (issuer size > $100 million)
Company Specific Research
Factors examined in all companies
- Asset protection
- Cash flow/Deleveraging
- Management team
- Liquidity sources
- Competitive position
Proprietary industry models
- Analysts assess company strength within context of industry expertise
Relative Value Screen
Proprietary Industry Models
- Receive real-time data feeds from multiple sources
- Input from analysts’ financial projections
- Portfolio decisions based on credit vs. price
Diversification Principles
Preferred Characteristics
- Positive industry fundamentals
- Industry pricing power
- Benign regulatory environment
- Favorable demographic trends
High Yield Leveraged Loans: Industry Concentration
- 2x industries that are 4% or greater in index
- 3x industries that are less than 4% in index
Structure Review
Analyst Reviews
- Security structure
- Cash flow structure
- Position in capital structure
Recommends
- Senior or subordinated
- Secured or unsecured
- Fixed or floating
Analyst Recommendations
- Recommendations are debated in group discussions
- Portfolio managers make final decision across industries
- Traders review technicals and implement strategy as soon as practicable
Monitoring & Oversight
- Proprietary internal database allows analysts to track company fundamentals, industry news, financial information and detailed terms of the credit agreements
Past performance is not indicative of future results.
Investment Risk Management
Prudent risk management is crucial to our Leveraged Loan process. We employ a strict portfolio construction methodology, sell discipline, and trading strategy to mitigate risk.
Portfolio Construction
We actively manage our Leveraged Loans Strategy, tailoring to clients' objectives.
Allocation decisions are a collaborative effort between our Senior Portfolio Managers and Analysts. By focusing on healthy credits, we aim to reduce the inherent default risk associated with Leveraged Loans.
Issuer selection is the most important component of our management style. We believe that extensive and meticulous credit and structure research is the key to successful issuer selection. Since we make no attempt to time the market or forecast interest rates, we devote our resources to identifying value opportunities.
Our Senior Portfolio Managers construct each client portfolio from the bottom-up, loan-by-loan; we do not compromise our strict underwriting standards to achieve an artificial yield level.
Sell Discipline
We employ a strict sell discipline for our Leveraged Loans Strategies with the objective of generating superior risk-adjusted returns over a market cycle.
Our leveraged loan sell discipline has two components:
Upside Spread Target:
- Analyst establishes upside spread target for all portfolio holdings at time of purchase
- Team monitors spread targets continuously, to reflect fundamental and market conditions
- Team sells loans when spread targets achieved
Downside Tolerance Limit:
- Price decline of 5%, relative to peers, may trigger a formal credit review
- Buy / Hold / Sell recommendation established as result of a credit review
- Position is sold if the sponsoring analyst determines that the issuer’s fundamentals have changed
- We believe the first sale is often the best sale
