Alternative debt solutions
Commercial real estate loans and corporate loans – attractive and worthwhile from a regulatory point of view
Inflation rates are rising while interest rates remain low. Faced with this situation, pension funds and insurers are finding it increasingly difficult to generate attractive returns with their portfolios, which are traditionally made up of bonds in most cases. Alternative investments can help investors to achieve their investment goals, despite these adverse conditions. One asset class that both company pension schemes as well as insurance companies would do well to consider are loans. This applies equally to commercial real estate loans and classic high-coupon corporate loans.
Loans are especially suitable for pension funds as their long-term investment horizons enable them to do without liquidity. They are rewarded for this in the form of an illiquidity premium. As a result, real estate loans, for example, currently offer higher yields than investment grade credit with a comparable risk profile. The same applies to corporate loans in relation to high yield bonds of comparable risk. What is more, loans are also ideally suited for diversifying portfolios. Unlike most bonds, loans are variable rate arrangements, which makes them less exposed to interest rate risks.
Collateralized Loan Obligations (CLOs): Loans, cleverly packaged
A particularly precise way of investing in corporate loans is through Collateralized Loan Obligations (CLOs). These are special purpose vehicles based on a pool of corporate loans, compiled in observance of strict quality and diversification specifications. A CLO consists on the one hand of various loan tranches structured in accordance with the investor's requirements, and on the other hand an equity tranche with different rankings and correspondingly differing ratings and expected cash flow profiles (see chart). The tranches with higher ratings offer low coupons but are senior ranking. The tranches with lower ratings imply higher risks, but this is compensated for by the prospect of higher returns. And, finally, the equity tranche does not have a rating at all, which means that, in the event of success, it rakes in all the surplus returns generated in the structure. Just like corporate loans, which after all is what these vehicles consist of, CLOs also offer more attractive returns than classic bonds with a comparable risk profile.
Loans: What AXA Investment Managers can do for you
AXA Investment Managers originally set up Europe's first platform for corporate loans in the year 2000. AXA IM has been operating in the CRE loans segment since 2005, where it is now the European market leader. A disciplined approach and rigorouslyapplied loan lending rules are as much a feature of AXA IM as the company's strong credit research and large network in the loan market. In the CLO segment, AXA IM can boast a >15 year-long track record, and is now one of the largest European investors outside the banking sector.
Ideal conditions, we believe, for enabling investors to generate attractive returns, even in these challenging times.