In the Search for Yield Leveraged Loans Make a Comeback

“(MoneyWatch) Whenever interest rates fall to low levels, investors who are normally risk averse when it comes to their bond purchases begin trading safety for yield. Among the popular choices are junk bonds, preferred stocks, high-dividend stocks, REITs and MLPs. Now, we’re even seeing resurgence in what are called leveraged loans. Apparently, investors haven’t learned their lessons from the financial crisis.

These loans are floating rate notes, which provide higher yields (currently about 5.2 percent) and don’t have the same term risk that junk bonds have because their yields move together with interest rates. However, they entail significant price risk because they’re backed by bank loans of lower quality. Banks make these loans, which are often used to finance leveraged buyouts, anticipating that they can get them off their balance sheets by selling them to investors….”

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