Senior Loans: Why NAV Drifts Lower While Total Return Stays Positive

Senior loan fund NAVs often drift lower over time due to structural factors like credit losses and limited price upside, but high floating-rate coupon income typically leads to positive total returns.

Key Takeaways

• 1.Total return (income plus price) is a more accurate measure of senior loan performance than NAV alone, which often drifts lower due to structural factors.
• 2.Senior loans have historically shown positive total returns in 30 out of the last 33 years, driven primarily by floating-rate coupon income.
• 3.NAV erosion in senior loan funds is caused by modest credit losses, limited price upside (loans trade near par), and distributions from floating-rate coupons.

Table of Contents

• Executive Summary
• Q1: What are senior loans, and how do they differ from traditional fixed income assets?
• Q2: What are the main components of returns for senior loans?
• Q3: Why do senior loan fund NAVs often drift lower over time, even when total returns are positive?
• Q4: What factors contribute to NAV erosion or limited appreciation?
• Q5: Why is income the primary driver of senior loan returns?
• Q6: What is the difference between NAV and total return for senior loan funds?
• Q7: How have senior loan yields and returns compared to other fixed income assets?
• Conclusion: Key Takeaways for Evaluating Senior Loan Performance
• Investment risks
• Important information

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