Skip to main content

UK pension funds take on leveraged loans in search for yield

UK pension funds are dipping a toe into the specialist market for high yielding but risky bank loans in an effort to offset poor returns in their traditional investment portfolios.

After years of slow economic growth and record low interest rates, UK pension funds have this year for the first time turned to leveraged loans: they now average 2 percent of their total portfolios since the start of 2013, pension consultants say.

 

Buying up these kind of loans is commonplace in the U.S., where pension funds and insurers have been investing in them since the early 1990s. They currently allocate up to 5 percent of their entire portfolio to leveraged bank loans.

But some experts caution that UK pension funds are venturing into a market historically dominated by specialist investors without fully considering the high levels of management required to look after the assets they are buying, which often involve struggling companies or homeowners.

Leveraged loans are given by banks to companies and individuals that already have high levels of debt and because of the higher risk of default they carry a higher rate of return. So far pension funds have steered clear, sticking to investment-grade rated bonds on the grounds that leveraged loans' yields were not sufficiently high to counter their risk profile.

But now several factors are tempting them in. For starters government bonds and gilts are giving such lacklustre returns, that pension funds are under pressure to look for alternatives.

On top of that, pension funds find they can negotiate good buyers' terms because so many banks are obliged to sell these loans on - getting rid of high-risk assets in accordance with new "Basel III" rules which tell lenders to have higher levels of capital to set against the lower-risk loans they do make.

Returns from leveraged loans are typically around 500 basis points, or 5 percentage points, over Libor, the daily published rate at which banks lend money to each other. 10-year UK government bonds, or Gilts, are currently yielding around 1.8 percent, while German Bunds are returning around 1.3 percent.

FURTHER GROWTH

The Western European leveraged loan market is worth around 418 billion euros according to Credit Suisse fixed income research, and growing, say pension experts.

Some of the larger European pension funds are already allocating between 1-1.5 percent of their portfolios to loans via specialist fund managers, says Axa Investment Managers.

"In the last nine months, we saw 400 million euros of inflows come into our loan funds from pension funds and insurers," Jean Philippe Levilain, head of structured finance U.S. at AXA Investment Managers, said.

He expects weightings from investors to increase to 2-3 percent of their portfolio in the next couple years.

Dutch pension administrator PPGM has been targeting loans in the U.S. and Western Europe since 2012. The firm currently allocates 13 percent of its high yield investment mandate to bank loans in emerging markets, and 15 percent for U.S. and Western Europe. Overall, loans in both regions represent 2 percent of its 133 billion euro portfolio.

"The skills needed are not much different from those required to successfully invest in high yield bonds," Guillaume van der Linden, head of emerging markets credits at PGGM, said.

_0">

The loans are not as risky as they appear on first glance. The default rate on leveraged loans is 2.8 percent, data from Moody's Investors Service shows. Furthermore, the loans are structured so that pension funds are paid back before other investors if the company defaults.

_1">

However, the work involved in owning these assets is not to be underestimated, some experts warn.

_2">

"There's a lot of servicing required by these portfolios, lots of phone calls. You need someone to help each borrower when they request their statement, or if they want to move house... You'd be surprised how much management the 70,000 loans that we service actually takes," said Alex Maddox, head of business origination at debt servicing company Acenden.

_3">

Nevertheless, a UK survey by Aon Hewitt consultants suggests pension funds are unfazed: 36 percent of respondents were considering increasing their allocation to alternative assets - the category covering bank loans - over the next year.

_4">

"Until there is a meaningful rise in government gilt yields, interest in this area will remain solid. Pension funds..have a long term strategic interest in boosting their wider bond portfolio," said Tapan Datta, global head of asset allocation at Aon Hewitt.

_5">

Popular posts from this blog

Study Abroad USA, College of Charleston, Popular Courses, Alumni

Thinking for Study Abroad USA. School of Charleston, the wonderful grounds is situated in the actual middle of a verifiable city - Charleston. Get snatched up by the wonderful and customary engineering, beautiful pathways, or look at the advanced steel and glass building which houses the School of Business. The grounds additionally gives students simple admittance to a few major tech organizations like Amazon's CreateSpace, Google, TwitPic, and so on. The school offers students nearby as well as off-grounds convenience going from completely outfitted home lobbies to memorable homes. It is prepared to offer different types of assistance and facilities like clubs, associations, sporting exercises, support administrations, etc. To put it plainly, the school grounds is rising with energy and there will never be a dull second for students at the College of Charleston. Concentrate on Abroad USA is improving and remunerating for your future. The energetic grounds likewise houses various

Best MBA Online Colleges in the USA

“Opportunities never open, instead we create them for us”. Beginning with this amazing saying, let’s unbox today’s knowledge. Love Business and marketing? Want to make a high-paid career in business administration? Well, if yes, then mate, we have got you something amazing to do!   We all imagine an effortless future with a cozy house and a laptop. Well, well! You can make this happen. Today, with this guide, we will be exploring some of the top-notch online MBA universities and institutes in the USA. Let’s get started! Why learn Online MBA from the USA? Access to More Options This online era has given a second chance to children who want to reflect on their careers while managing their hectic schedules. In this, the internet has played a very crucial in rejuvenating schools, institutes, and colleges to give the best education to students across the globe. Graduating with Less Debt Regular classes from high reputed institutes often charge heavy tuition fees. However onl

Sickening moment maskless 'Karen' COUGHS in the face of grocery store customer, then claims she doesn't have to wear a mask because she 'isn't sick'

A woman was captured on camera following a customer through a supermarket as she coughs on her after claiming she does not need a mask because she is not sick.  Video of the incident, which has garnered hundreds of thousands of views on Twitter alone, allegedly took place in a Su per Saver in Lincoln, Nebraska according to Twitter user @davenewworld_2. In it, an unidentified woman was captured dramatically coughing as she smiles saying 'Excuse me! I'm coming through' in the direction of the customer recording her. Scroll down for video An unidentified woman was captured dramatically coughing as she smiles saying 'Excuse me! I'm coming through' in the direction of a woman recording her A woman was captured on camera following a customer as she coughs on her in a supermarket without a mask on claiming she does not need one because she is not sick @chaiteabugz #karen #covid #karens #karensgonewild #karensalert #masks we were just wearing a mask at the store. ¿ o