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Comparing European and US leveraged loans

Insights

M&G Investments

07/11/2019

While European and US leveraged loans have very similar features that make them valuable in a portfolio context, investors need to understand how the two loan markets structurally and operationally differ from one another and what it takes to invest successfully in each. This paper aims to explain those differences and the reasons why European loans may offer a better risk-return profile than their US counterparts.

Investor participation in the US predates that of Europe, but institutional investors have steadily recognised the benefits of making a strategic allocation to European leveraged loans
The performance of European loans typically offers a premium over time and, while liquidity is more limited compared to the US, it is tolerable by the pension funds and insurance companies that commonly allocate to the market over a cycle
For investors looking to diversify away from dollar debt, European loans should be noted for their high running income (enhanced by the presence of zero floors), defensive features and relatively stable returns.

The value of investments will fluctuate, which will cause prices to fall as well as rise and investors may not get back the original amount they invested.