There are a handful of exchange traded funds ("ETFs") and closed-end funds ("CEFs") that specialize in buying bank loans. Bank loans are also referred to as "senior loans" or "leveraged loans".
Bank loans are typically large loans that are issued in connection with recapitalizations, acquisitions, leveraged buyouts and re-financings. A lead bank or other lending institution will arrange a large loan to a company as agent for a group of participating lenders. The loan is a "senior" loan, which means the lenders have a claim against the company's assets in the event of a bankruptcy that is a priority over claims of other creditors. Once the loan is issued, portions of the loan can be "sold" to other investors, often by entering into an assignment or participation agreement. Because bank loans are bought and sold through such private agreements, bank loans are not "publicly traded".
Bank loans are unique for several reasons. 1) Bank loans are loans to companies that typically already have a high amount of debt and are often characterized by lower credit ratings or higher interest rates. 2) Bank loans are floating rate loans based on an interest rate benchmark like LIBOR. As interest rates change, the rate on the bank loan will generally change, but bank loans do not contain purely variable interest rates. Instead, the interest rates can change, but only within certain reset periods and reset calculations. 3) Most bank loans are rated below investment grade. 4) The risks associated with bank loans are similar to the risks of below investment grade securities, although bank loans are typically senior and secured in contrast to other below investment grade securities, which are often subordinated and unsecured.
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