The Essence of Leveraged Loan Indexes (LLIs)
A Leveraged Loan Index (LLI) is a market-weighted index that measures the performance of institutional leveraged loans. These loans, part of the high-yield or ‘junk’ bond market, are senior secured debt obligations rated below investment-grade. An LLI offers valuable insights as it tracks the market-weighted performance of these loans.
Highlights
- Performance Tracking: LLI monitors the performance of institutional leveraged loans based on market weight.
- Nature of Loans: Leveraged loans cater to entities with significant existing debt or low credit ratings, offering higher yields to compensate for increased risk.
- Risk and Yield: Fixed-income securities tracked by an LLI tend to be riskier and offer higher yields compared to investment-grade bonds.
How Leveraged Loan Indexes Operate
Leveraged loans are structured through a syndication process, involving multiple lenders to mitigate individual credit risk exposure. Among the most prominent LLIs is the S&P/LSTA U.S. Leveraged Loan 100 Index, encompassing the largest and most liquid institutional loan issues. Various other indexes globally track similar metrics, ensuring a broad perspective on leveraged loan markets.
Regular rebalancing ensures these indexes reflect current market conditions and maintain accuracy in performance tracking. Institutions like IHS Markit and Credit Suisse frequently update their leveraged loan indexes, catering to diverse investor needs.
Practical Applications of Leveraged Loan Indices
Leveraged Loan Indices serve as performance yardsticks for portfolio managers and foundations for passive investment vehicles like ETFs. A prime example is the Invesco Senior Loan Portfolio (ticker: BKLN), derived from the S&P/LSTA U.S. Leveraged Loan 100 Index. This portfolio primarily invests in the securities comprising the index, although slight discrepancies in asset allocation can result in performance variances.
Leveraged Loan Indices and Derivatives
LLIs also relate to derivative products involving leveraged loans. Notable indices like the iTraxx LevX represent a compilation of credit default swaps (CDSs) for highly liquid European companies in the secondary market. With specialized subsets for senior and subordinated debts, entities can tailor their exposure and risk management more effectively.
Related Terms: High-Yield Bonds, Loan Syndication, Credit Default Swaps, Leveraged Buyouts, Exchange Traded Funds.
References
- S&P Global. “S&P/LSTA U.S. Leveraged Loan 100”.
- Invesco. “Invesco Senior Loan ETF”, Page 1.
- IHS Markit. “Markit iTraxx LevX Indices”.
- Global Capital. “iTraxx LevX – A Primer”.
