Leveraged Loan Index (LLI)

What Is a Leveraged Loan Index (LLI)?

A leveraged loan index (LLI) is a market-weighted index that tracks the performance of institutional leveraged loans. Several indexes for the market exist, yet the most widely followed one is the S&P/LSTA U.S. Leveraged Loan 100 Index.

A leveraged loan is a senior secured debt obligation that is rated below investment grade (i.e., part of the high-yield or "junk" bond market). Leveraged loans are issued to finance leveraged buyouts (LBOs), and the vast majority of the loans are traded in the secondary market. The leveraged loan index tracks the prices of the loans.

How a Leveraged Loan Index Works

A leveraged loan is structured, organized, through a cycle known as syndication. Loan syndication is the most common way of uniting a group of lenders in funding different parts of a loan for a single borrower, frequently to broaden the credit risk exposure of any single lender. This form of a leveraged loan index is a common benchmark and addresses the 100 biggest and most liquid issues of the institutional loan universe.

The most well known leveraged loan index (LLI) was developed by Standard and Poor's (S&P) and the Loan Syndications and Trading Association (LSTA). A sub-index gathered by S&P and LSTA is the U.S. Leveraged Loan 100 B/BB Rating Index, while S&P has a Global Leveraged Loan 100 Index all alone to remember major issuers for Europe. The indexes are rebalanced two times every year. IHS Markit Ltd. what's more, Credit Suisse likewise keep up with proprietary leveraged loan indexes.

Leveraged Loan Indices in Practice

A LLI fills in as a benchmark for performance measurement of fund managers dedicated to leveraged loan investment strategies and as a basis for passive investment vehicles, for example, exchange traded funds (ETF).

For instance, the Invesco Senior Loan Portfolio (ticker: BKLN) depends on the S&P/LSTA U.S. Leveraged Loan 100 Index. As per Invesco, the asset management company that offers BKLN, the fund contributes something like 80% of its total assets in the constituent securities that make up the leveraged loan index, which tracks the market-weighted performance of the part loans in light of market weightings, spreads, and interest payments. On the off chance that under 100% of the assets are invested in the part securities of the index, there will be variability in the performance of the ETF versus the index.

LLIs and CDSs

Some LLIs are tailored to derivatives products that use leveraged loans. For example, the iTraxx LevX are a pair of two tradable indexes that hold credit default swaps (CDSs) addressing a diversified basket of the 40 (formerly 35) most liquid European companies that have tradable debt offerings in the secondary market.

The LevX indices track what are known as leveraged loan credit default swaps (LCDS). The iTraxx LevX Senior Index addresses just senior loans, while the iTraxx LevX Subordinated Index addresses subordinated debt including second-and third-lien loans.

Highlights

• The fixed-income securities followed by a LLI will be riskier and higher-yield than investment-grade benchmark bond indices.
• A leveraged loan index (LLI) tracks the performance of institutional leveraged loans on a market-weighted basis.
• A leveraged loan is a type of credit facility that is extended to companies or people that as of now have significant measures of debt or a poor credit history