What is a leveraged loan index (LLI)?
An index that is market-weighted and measures the performance of institutional leveraged loans is called a leveraged loan index (LLI). There are several market indices, but the S&P/LSTA U.S. Leveraged Loan 100 Index is the most popular.
A senior secured debt obligation with a rating lower than investment grade, or one that belongs to the high-yield or “junk” bond market, is called a leveraged loan. Most leveraged loans trade on secondary market finance leveraged buyouts (LBOs). The leveraged loan index keeps track of the loan prices.
The Operation of a Leveraged Loan Index
Syndication is the process by which a leveraged loan is organized. The process of assembling a group of lenders to fund different parts of a loan for a single borrower is known as loan syndication. This is frequently done to reduce the credit risk exposure of a single lender. This version of a leveraged loan index represents the 100 most significant and liquid issues in the institutional loan universe, serving as a standard benchmark. The Loan Syndications and Trading Association (LSTA) and Standard & Poor’s (S&P) created the most well-known leveraged loan index (LLI). The U.S. Leveraged Loan 100 B/BB Rating Index is a sub-index that S&P and LSTA put together, while S&P has its own Global Leveraged Loan 100 Index that includes significant European issuers. Twice a year, the indices are rebalanced. Credit Suisse and IHS Markit Ltd. also keep their own proprietary leveraged loan indices.
In Practice, Leveraged Loan Indices
An LLI forms the foundation for passive investment vehicles like exchange-traded funds (ETF) and is used as a benchmark for evaluating the performance of fund managers who specialize in leveraged loan investing techniques.
For instance, the S&P/LSTA U.S. Leveraged Loan 100 Index is the foundation for the Invesco Senior Loan Portfolio (ticker: BKLN). Invesco, the asset management firm that offers BKLN, states that the fund allocates at least 80% of its total assets to the individual securities comprising the leveraged loan index. The index measures the market-weighted performance of individual loans by considering spreads, interest rates, and market weightings.
The performance of the ETF will differ from the index if fewer than 100% of the assets are allocated to the index’s constituent securities.
CDSs and LLIs
Leveraged loans are used in some derivatives products for which certain LLIs are designed. For example, the two tradable indexes known as iTraxx LevX contain credit default swaps (CDSs), a diversified basket of the 40 (formerly 35) most liquid European corporations with secondary market tradable debt offerings.
The LevX indices track leveraged loan credit default swaps (LCDS) securities. The iTraxx LevX Senior Index only includes senior loans; the iTraxx LevX Subordinated Index, which reflects subordinated debt, also contains second- and third-lien loans.
Conclusion
- Based on the weight of the market, a leveraged loan index (LLI) tracks how well big leveraged loans are doing.
- Individuals or businesses with a lot of debt or a bad credit background can get a leveraged loan.
- The fixed-income products that LLI tracks will likely have a higher return and be more risky than investment-grade benchmark bond indices.
