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- Different Types of Debt Investing
“Investing and lending are two sides of a coin - as is rate and return. We care about rate when we are borrowing, and return when we are investing.”
a BORROW SMART CONCEPT
What is Debt Investing?
There are many different types of debt investing. I like investing in debt because I understand debt, as a mortgage lender I get that people borrow money for different reasons, and that money has to be paid back. The collateral is important, as are the rates of return.
Interest rates have risen significantly in the past two years, impacting debt-related investments.
Lower-risk, long-term debt has seen the most significant price drops and now may be a good time to consider TLT (long-term bonds) but there are many ways to invest in debt, but bonds are down 54% from their peak.
Opportunities in Debt Investment:
Despite market volatility, high yields across various debt types offer attractive investment opportunities.
Yields are crucial in determining total returns from debt investments.
Asset-Based Financing (ABF):
Gaining traction due to traditional lenders scaling back.
Loans are backed by tangible assets, offering risk-adjusted returns.
Diversification across different assets and a natural hedge against inflation.
Private ABF is growing, with companies like KKR & Co. Inc focusing on this area.
Examples: KKR, SLRC
Leveraged Loans:
Typically floating-rate, senior loans to corporations with B/B+ ratings.
Attractive due to their floating rates, high recovery rates, and transparency.
Leveraged loans face challenges due to banks needing to balance their sheets.
Examples: PTY, ECC, XFLT, OXLC
Private Senior Secured Loans:
Similar to leveraged loans but not publicly rated.
Higher spreads and flexible terms.
Gaining interest as banks retreat from making large illiquid loans.
Commercial Mortgages:
Usually, floating-rate investments are secured by commercial real estate.
Investment through CMBS or mortgage REITs.
REITs offer more flexibility and active management.
Examples: BIZD, MAIN, TPVG, ARI, ACRE, BRSP
Residential Mortgages:
Agency MBS, backed by Fannie Mae or Freddie Mac, are low-risk.
Agency MBS is attractive due to no credit risk and higher yields than Treasuries.
Examples: AGNC, NLY, IVR
Corporate Baby Bonds:
Issued by corporations, can be secured or unsecured.
Offer fixed income, transparency, and accessibility.
Publicly traded, which can lead to market-driven price fluctuations.
Examples: ATCOL, RILYT, BWSN, ECCX
Future Impact of Market Conditions:
Rising interest rates and economic stress can create both challenges and opportunities in debt investing.
It's important to consider the risk, yield, and market dynamics when investing in different types of debt.
Conclusion:
Debt investing in the current economic climate presents diverse opportunities. From asset-based financing to corporate bonds, each type of debt has unique characteristics and risks. Investors should consider these factors, along with the broader economic context, to make informed decisions. This is not a recommendation to buy or sell any security; I’m not a financial advisor, so do your own research.
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