One of the phrases our bank loan team loves to use is “whatever happens in the high yield market, happens in the bank loan market, only less.”
Why is this statement typically true? Because many of the companies that issue bank loans also issue high yield bonds. A typical corporate capital structure has about 40% floating rate bank debt, 40% fixed high yield bonds, and 20% equity. So when investor sentiment is dominating market action, it makes sense that both the bank loan and high yield markets would be affected in a similar way. However, since bank loans are senior in the capital structure and secured by the assets of the company, movements caused by negative market sentiment actually hurt the bank loan market less. These bank loan traits tend to help protect investors from outsize market movements.