These loans are generally secured by a borrower’s assets and are at the top of a company’s capital structure. Therefore, loan investors have the first claim on the assets and cash flow of a corporation in the event of a default or bankruptcy, ahead of unsecured and, or junior bondholders and equity investors.
Senior secured loans are structured with floating rate interest. When market interest rates increase, over time the interest income on these loans also increases and vice versa. The characteristics of senior loans as compared to conventional bonds in response to changes in interest rates is illustrated below.
Senior loans are originated by major banks and syndicated to a wide range of institutional and retail investors. They are actively bought and sold among investors, brokers and dealers and are priced on a daily basis in a US market of over $1.2 trillion as of 2019 (Source: S&P Global).