Loans should add call protection, argues report

In a report published last week, independent credit research firm CreditSights suggests that borrowers should start adding call protection to their loans to make them more attractive to buyers of high yield bonds.

It notes that leveraged loan volumes are likely to continue to decline unless the asset class can in crease its appeal to non-levered and non-CLO buyers. While the loan market is dominated by CLOs and hedge funds, high yield bonds have a very different investor base, consisting primarily of mutual funds, pension funds and insurance companies. These big three groups of bond investors have not previously crossed over into buying loans to any great extent.

CreditSights analyst Chris Taggert writes that the best trade-off – making loans more attractive to bond investors while keeping as much of their appeal as possible to CLOs and hedge funds – would be for companies to provide investors with protection against loans being called early.

The issuer’s option to call a loan makes it hard for investors to assess the duration of their investments. Call protection would change this, and, as the report notes, even a small increase in participation by these huge groups of investors would represent a sizeable increase in demand for loans.

Although some loans already include call protection, these measures tend to be much weaker than in bonds.