With many portfolios still looking for income, diversification and better control over interest rate exposure, loan-backed bonds are moving back into the fixed income conversation.
Banks and other lenders group together pools of loans, then turn the cash flows from those loans into bonds that investors can buy. These loans may be linked to residential mortgages, consumer finance, corporate lending, commercial property or infrastructure projects. Investors are not buying a single loan. They are buying exposure to a structured pool of loans, with different levels of risk and return available depending on the security selected.
Securitised credit is usually divided into tranches, with senior bonds paid first and lower-ranking bonds paid later. Senior tranches are designed to offer more protection but usually provide lower yields. Junior tranches take more risk and may offer higher income.
Many investors want income, but they do not necessarily want to add too much duration or rely only on government and corporate bonds. Some securitised credit markets use floating-rate structures, which can reduce sensitivity to changes in interest rates.
Securitised credit can give investors exposure to household borrowing, consumer payments, corporate loans, property debt and infrastructure lending. These are different sources of risk from traditional corporate bonds. They can behave differently across the economic cycle, which may help broaden the return profile of a fixed income portfolio.
Volta Finance Ltd (LON:VTA) is a closed-ended limited liability company registered in Guernsey. Volta’s investment objectives are to seek to preserve capital across the credit cycle and to provide a stable stream of income to its Shareholders through dividends that it expects to distribute on a quarterly basis.
