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, but 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 rated below investment grade. Leveraged loans are issued to finance leveraged buyouts (LBOs), and most of the loans are traded in the secondary market. The leveraged loan index tracks the prices of the loans.
How a Leveraged Loan Index (LLI) Works
The most popular leveraged loan index (LLI) was developed by Standard & Poor’s (S&P) and the Loan Syndications and Trading Association (LSTA). This version of the leveraged loan index is a common benchmark and represents the 100 largest and most liquid issues of the institutional loan universe. A sub-index assembled 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 on its own to include major issuers in Europe. The indexes are rebalanced twice per year. IHS Markit Ltd., JP Morgan Chase and Credit Suisse also maintain proprietary leveraged loan indexes.
An LLI serves as a benchmark for performance measurement of fund managers dedicated to leveraged loan investment strategies and as a basis for passive investment vehicles such as exchange-traded funds (ETF). For example, the PowerShares Senior Loan Portfolio (ticker: BKLN) is based on the S&P/LSTA U.S. Leveraged Loan 100 Index. According to Invesco, the asset management company that offers BKLN, the fund invests at least 80% of its total assets in the constituent securities that make up the leveraged loan index, which tracks the market-weighted performance of the component loans based on market weightings, spreads and interest payments. If less than 100% of the assets are invested in the component securities of the index, there will be variability in the performance of the ETF versus the index.
A leveraged loan index (LLI) tracks the performance of institutional leveraged loans.