Corporate Loans as an Asset Class

Abstract

ELLIOT ASARNOW is a managing director at ING Capital Advisors in New York (NY 10022). nstitutional investors are showing an increasing interest in floating-rate corporate bank loans. A common attraction is that these assets maintain I their value in the face of rising interest rates and inflation, and provide a relatively stable total return. A particular appeal is that, while providing a short duration, they enhance return by providing a substantial spread above the risk-free rate with attractive risk/return characteristics. Bank loans are also a major new source of corporate paper for investors facing a shortage of paper in the corporate bond and private placement markets. Strategies involving investments in floating-rate instruments are generally viewed as defensive, i.e., motivated by a view of impending increases in prevailing interest rates or a flattening of the yield curve, but more neutral asset-liability management considerations not driven by a view of the interest rate cycle may also increase the demand for short-duration assets. The dramatic growth of the single-premium deferred annuity product in the insurance industry shows how shortduration assets can play a usehl role, since these liability products typically reset annually with reference to prevdng market rates. A significant barrier to increased institutional investor participation in the corporate loan market has been the absence of rigorous analytical work describing the historical investment performance of loans and of strategies for deploying them in multiasset-class portfolios. This study seeks to meet the need of insti-