The bank loan market – or “leveraged loan” market, as it is sometimes known – comprises debt from companies with below–investment grade credit ratings. Bank loans are typically secured with a lien on the company’s assets. They also generally rank senior to the company’s other debt and offer higher credit ratings, or less risk and more collateral backing, than unsecured bonds. Companies tap this market predominantly to fund mergers & acquisitions, leveraged buyouts or for general corporate purposes.
PIMCO’s Bank Loan universe includes primarily the upper tiers of the U.S. bank loan market that are mainly secured by first-lien asset obligations. We believe that in this market environment first-liens provide better compensation due to their higher underlying asset quality and liquidity. We do take exposure to second-lien debt, albeit at much more modest levels, when valuations relative to associated risks merit investment.