Senior Bank Loan 2017 Outlook
Senior bank loans returned more than 10% in 2016. Looking ahead to 2017, the asset class seems poised for another strong year. Our “base” case for the total return of the S&P/LSTA Leveraged Loan Index in 2017 falls between 4.5–5.0%, i.e., within the range of coupon expectation.
Other than CCC/D-rated loans that we believe are fully valued, most of the Index is trading at or near par. Accordingly, given the general “callability” of loans, we see little in the way of material upside price appreciation. However, that is only one part of the story. Loans continue to offer attractive yields with no material duration risk and offer attractive returns relative to similarly situated alternatives. Additionally, the gap between the LIBOR floor of loans and spot (or actual) LIBOR has essentially disappeared, making loans even more attractive in a year where interest rates are expected to increase.