What Is a Leveraged Loan Index (LLI)?
Let me explain what a leveraged loan index, or LLI, really is—it's a market-weighted index that tracks the performance of institutional leveraged loans. You'll find several indexes out there, but the one most people follow is the S&P/LSTA U.S. Leveraged Loan 100 Index.
A leveraged loan itself is a senior secured debt obligation rated below investment grade, meaning it's part of the high-yield or 'junk' bond market. These loans get issued to finance leveraged buyouts, or LBOs, and most trade in the secondary market. The index simply tracks the prices of these loans.
Key Takeaways
Here's what you need to know: An LLI tracks institutional leveraged loans on a market-weighted basis. Remember, a leveraged loan is a credit facility given to companies or individuals already loaded with debt or with a poor credit history. The fixed-income securities in an LLI are riskier and offer higher yields than those in investment-grade bond indices.
How a Leveraged Loan Index Works
A leveraged loan gets structured and arranged through syndication, where a group of lenders comes together to fund parts of a loan for one borrower, spreading out the credit risk. This type of index is a standard benchmark, covering the 100 largest and most liquid issues in the institutional loan space.
The top leveraged loan index comes from Standard & Poor’s (S&P) and the Loan Syndications and Trading Association (LSTA). They also have a sub-index called the U.S. Leveraged Loan 100 B/BB Rating Index, and S&P runs a Global Leveraged Loan 100 Index that includes big European issuers. These get rebalanced twice a year. Other players like IHS Markit Ltd. and Credit Suisse maintain their own proprietary indexes.
Leveraged Loan Indices in Practice
In the real world, an LLI acts as a benchmark for measuring how fund managers perform in leveraged loan strategies, and it underpins passive investments like exchange-traded funds (ETFs).
Take the Invesco Senior Loan Portfolio (ticker: BKLN) as an example—it's based on the S&P/LSTA U.S. Leveraged Loan 100 Index. Invesco says the fund puts at least 80% of its assets into the index's constituent securities, which track market-weighted performance based on weightings, spreads, and interest payments. If it's not fully invested in those securities, the ETF's performance will differ from the index.
LLIs and CDSs
Some LLIs are designed for derivatives that involve leveraged loans. For instance, the iTraxx LevX consists of two tradable indexes holding credit default swaps (CDSs) for a diversified basket of 40 of the most liquid European companies with tradable debt in the secondary market—previously it was 35.
These LevX indices track leveraged loan credit default swaps (LCDS). The iTraxx LevX Senior Index covers only senior loans, while the Subordinated Index includes second- and third-lien loans.
