Eaton Vance Corp., a manager of mutual funds, is starting its first Australian-domiciled fund that will invest in U.S. leveraged loans.
The fund will primarily buy floating-rate senior U.S. dollar loans pegged to the London interbank offered rate, Scott Page, Eaton Vance’s Boston-based director of bank loans, said at a briefing in Sydney. Australian investors transferring the income back into their own currency will receive Australian short-term money market rates, plus the yield premium from the loan investments, he said.
“In the current low-yield environment, floating-rate loans offer the potential for high income generation, while helping to reduce overall portfolio duration,” Page said in a statement. “In today’s challenging market conditions, investors are looking for ways to maintain their level of income while managing future risk.”
U.S. non-financial corporate borrowers are better equipped to withstand an economic contraction now than four years ago when the last U.S. recession began, Moody’s Investors Service said in an Oct. 12 report. The high-yield default rate in 2011 will be between 1 percent and 1.5 percent, less than a forecast of as much as 2 percent, Fitch Ratings said Oct. 18. Loans get repaid before high-yield bonds in a default.
Eaton Vance is targeting growth for its Australian fund to A$1 billion ($1 billion) within the next two to three years, Nicholas Allen, the country representative for Australia, said at the briefing. The firm managed $26.4 billion of floating-rate loan assets as of June, according to a presentation distributed today.
The Standard & Poor’s/LSTA U.S. Leveraged Loan 100 index added 1.02 cents last week to 90.63 cents on the dollar, the highest level since Aug. 8. The measure, which tracks the 100 largest dollar-denominated first-lien leveraged loans, has climbed from 86.96 on Oct. 5, the lowest since December 2009.
Leveraged loans and high-yield, high-risk debt are rated below Baa3 by Moody’s and lower than BBB- at S&P.