According to Jonnelle Marte of the Wall Street Journal, floating rate funds are a "Risky Yield Play." They have significant risks and investors must be aware of the downside. The increased demand for floating rate bonds has the effect of driving down yields. For example, during the credit crunch triple-C-rated companies paid as much as 47 percent for loans, but today that is down to 14 percent. Thus most of the returns have already been made.
Not so obvious is the fact that higher demand also results in looser restrictions for borrowers. These so-called "covenant-lite" loans, which have more relaxed repayment terms that are good for high-risk borrowers but bad for investors, now comprise 20 percent of the market - near the peak of 25 percent in 2007, according to the article.
Investors should be skeptical of the credit quality of floating rate loans. If the economy worsens, investors could experience significant losses.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
Not so obvious is the fact that higher demand also results in looser restrictions for borrowers. These so-called "covenant-lite" loans, which have more relaxed repayment terms that are good for high-risk borrowers but bad for investors, now comprise 20 percent of the market - near the peak of 25 percent in 2007, according to the article.
Investors should be skeptical of the credit quality of floating rate loans. If the economy worsens, investors could experience significant losses.
The most important of investors' rights is the right to be informed! This Investors' Rights blog post is by the Law Offices of Robert Wayne Pearce, P.A., located in Boca Raton, Florida. For over 30 years, Attorney Pearce has tried, arbitrated, and mediated hundreds of disputes involving complex securities, commodities and investment law issues. The lawyers at our law firm are devoted to protecting investors' rights throughout the United States and internationally! Please visit our website, www.secatty.com, post a comment, call (800) 732-2889, or email Mr. Pearce at pearce@rwpearce.com for answers to any of your questions about this blog post and/or any related matter.
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