Scott Page (vice-president, Eaton Vance Investment Managers): When people think of ‘non-investment grade’ in the United States, they think of the high-yield bond market. But there’s another market that’s closely aligned but significantly different from a high-yield bond market, and that’s the leveraged loan market. It’s been around for 20 years, and in the US it was about $600 billion; post-financial crisis that’s shrunk to about $500 billion. In Europe, it’s probably $100 billion to $150 billion. Now, high-yield bonds are subordinated down, they’re unsecured and fixed-rate. The bank loan asset class is senior, secured and floating rate. Those differences make for quite different investment characteristics. Admittedly, the floating rate aspect has not been terribly beneficial, because rates have drifted down for as long as anyone can remember in the US, and everywhere else. But we’re getting excited now about floating rate.
When we look at the instruments available that perform well in a rising rate environment, particularly for people unable to do sophisticated management of fixed or floating, we think bank loans are one of the few fixed-income asset classes with a track record that should perform well in a rising rate environment. The fact that loans are senior and secured has helped to mitigate credit risk. For instance, recoveries [after bankruptcies among our portfolio companies], even through this latest fall cycle of our portfolio, look like they’re going to come in around 70 cents. That lines up with what our recoveries have been for 20 years. So at Eaton Vance we have this unique data set we’re looking at and saying, ‘Well, this is a really cleancut spread.’ We can put it on top of a floating-interest rate. If you were to bring it to Australia, through a simple currency swap, you’d get the Australian short rate plus our credit spread, which is right now on 4 per cent.