Blackstone ETF Eyes Senior Loans

07/01/2015 9:00 am EST

Focus: ETFs

Mark Salzinger

Editor and Publisher, The No-Load Fund Investor

Senior loans describe loans that are issued typically to borrowers with below-investment-grade credit at a floating rate of interest, explains Mark Salzinger, editor of The Investor's ETF Report.

Senior means that the claims of these lenders outrank those of other creditors, so that in the event of bankruptcy they are repaid first (if there is anything left).

Interest due on such loans is usually determined by adding a predetermined percentage to a benchmark rate, which is gauged at a set interval, often 90 days. This means that the amount of interest always reflects prevailing interest rates, eliminating interest-rate risk to the lender.

SPDR Blackstone/GSO Senior Loan (SRLN) has outperformed its floating-rate fixed-income peers since inception. Actively managed, SRLN emphasizes business quality and smart money to identify attractive securities and generate a strong yield. SRLN recently yielded 4.1%.

The ETF is managed by Lee Shaiman and Gordon McKernie of GSO, an alternative asset management firm that is a division of Blackstone Group.

SPDR Blackstone/GSO Senior Loan also has been strong on a relative basis. Since its inception in April 2013, the ETF has generated a total return of 5.2% (through April 2015), beating its main competitor among ETFs, PowerShares Senior Loan (BKLN), by 1.8 percentage points.

The managers of SRLN seek out the debt of companies that appear to be of higher quality than the average senior loan borrower.

They look for companies with leading positions in their industries and advantages over competitors, factors they believe can help maintain cash flows and profitability sufficient to meet debt obligations.

Such companies are likely to be established in their markets and have consistent positive cash flow; companies that are just starting up or are in the midst of some kind of turnaround are not favored.

Outside of a company’s operations and management, the focus is on participants in a company’s credit structure. They look for smart money to support potential investments, focusing specifically on companies whose credit offerings are sponsored by what they believe to be superlative private-equity firms.

They view such sponsorship as an endorsement of the investment and a willingness to share in the risk of ownership, including potential additional investment should economic or operational difficulties occur and cash-flow needs arise.

SRLN recently held 175 individual securities. The largest allocations to individual industries included business services (12%), technology (9%), retail (8%), telecommunications (8%), healthcare (8%), and hotel/gaming/leisure (7%).

Holdings are largely rated B (55% of the portfolio) or BB (the highest below investment-grade tier, 33%).

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