Strategy Spotlight

Understanding Bank Loans

Here we explain the fundamentals of syndicated bank loans and why they may be attractive to investors looking to reduce interest rate risk and diversify a fixed income portfolio.

More from this section

Read Transcript

Sabeen Firozali, Credit Strategist:A syndicated bank loan is a commercial loan to a corporation made by a bank. The company’s assets serve as collateral for the loan, so the loan is considered secured debt of the company. The bank holds on to a piece of the loan and sells of the rest of it to other parties. The buyers of the pieces of that loan then become lenders to the borrowing company.

Bank loans are important because loan coupons are tied to interest rates like LIBOR or prime.

Text on screen: Why Invest in Bank Loans

  • Floating interest rate
  • Senior in capital structure
  • Credit agreements

    Because they are floating rate instruments, they can be a good way to reduce interest rate risk. They’re also senior in priority of payments in case of a default or a bankruptcy. Bank loan agreements contain certain protections that help safeguard the lender’s collateral.

    Syndicated bank loans also come with risks. Without debt cushions underneath the loans, loan recoveries in default scenarios could be lower than what you would expect. 

    Text on screen: Potential Risks of Investing in Bank Loans

  • Reduced subordination
  • Weakening covenants
  • Reinvestment risks

    Protections offered to lenders under credit agreements have also been waning lately. Lastly, borrowers of bank loans can pay back loans with minimal penalties, which result in reinvestment risk for lenders.

    Text on screen: How does a syndicated bank loan work?

    Capital Structure

  • Bank Loans
  • Unsecured Debt
  • Equity

Since bank loans are secured debt of the company, they sit on top of a company’s capital structure and have first priority in payment in case of a default.

Graphic: The graphic titled The Capital Structure Waterfall: Realized Losses has a big green box titles assets to the left, with an arrow at the bottom that says losses. The arrow is pointing to the right column which includes three boxes: Equity, Unsecured bonds and Secured loans.

That is, cash from assets goes to pay loans first, then unsecured bonds, and then to the equity holders. The implication of that waterfall is that secured loans are the last to absorb losses when they do occur.

Because loans are the first to receive payment and last to realize losses, they have historically recovered at higher rates than high yield bonds have.

Chart: This bar chart show recoveries from high yield - 40% range, and bank loans - 70%-80% range.

Loan recoveries historically have been in the 70% to 80% range, while bond recoveries have been in the 40% range.

A covenant is a condition that is stipulated in a credit agreement between the borrower and the lender.

Affirmative covenants are things that a borrower must do, so things like a borrower must report financial statements after a certain amount of time, or a borrower must pay taxes.

Negative covenants are things that a borrower cannot do. Examples are a borrower cannot do M&A in excess of a certain amount without getting consent from the lender, or a borrower cannot pay a dividend to a shareholder without getting consent from a lender.

Financial maintenance covenants are those that require a borrower to meet certain financial metrics at certain time periods, such as, a borrower must meet a debt to EBITDA level of 4.0 by the end of this year.

Compared to the last cycle, however, bank loans now offer reduced subordination and weaker covenants. For that reason, it is crucial to scrutinize loan agreements to ensure that adequate protections are being offered.

It is also essential to assess the capital structure of the borrower to make sure that there is adequate subordinated debt and equity to absorb first losses. 

In conclusion, bank loans are a good way to diversify a fixed income portfolio and have exposure to floating rate credit risk that sits on top of a company’s capital structure.

Call-to-action: For more insights and information, visit


All investments contain risk and may lose value. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy. There is no assurance that the liquidation of any collateral from a secured bank loan would satisfy the borrower’s obligation, or that such collateral could be liquidated. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Filters: Reset All


Close Filters Dropdown
  • Tags


  • Category


    Bond by Bond
    Economic and Market Commentary
    Investment Strategies
    PIMCO Foundation
    PIMCO Education
    View from the Investment Committee
    View From the Trade Floor
  • Order By


    Most Recent
() filters applied

Video Finder

Filter By:
  • Bond by Bond
  • Careers
  • Economic and Market Commentary
  • Investment Strategies
  • PIMCO Education
  • View from the Investment Committee
  • View From the Trade Floor
  • Viewpoints
  • Understanding Investing
  • A
  • B
  • C
  • D
  • F
  • G
  • H
  • I
  • K
  • L
  • M
  • N
  • O
  • P
  • Q
  • R
  • S
  • T
  • W
  • Y
Tina Adatia
Global and Core Fixed Income Product Strategist
Joshua Anderson
Portfolio Manager, Income and Asset-Backed Securities
Del Anderson
Credit Analyst
Robert Arnott
Founder and Chairman, Research Affiliates
Andrew Balls
CIO Global Fixed Income
Justin Blesy
Asset Allocation Strategist
Meredith Block
ESG Research Analyst
David L. Braun
Head of US Financial Institutions Portfolio Management
Jelle Brons
Portfolio Manager, Global Investment Grade Credit
Nathaniel Brown
Director of the PIMCO Foundation
Erin Browne
Portfolio Manager, Multi-Asset Strategies
Esteban Burbano
Fixed Income Strategist
Grover Burthey
Portfolio Manager, ESG
Libby Cantrill
Public Policy
Stephen Chang
Portfolio Manager, Asia
Devin Chen
Portfolio Manager, Commercial Real Estate
Josh Davis
Global Head of Risk Management
Laura Deneke
Sr. Vice President, Product Strategist
Pramol Dhawan
Head of Emerging Markets Portfolio Management
Joachim Fels
Global Economic Advisor
David Fisher
Co-Head of Strategic Accounts, U.S. Global Wealth Management
Gene Frieda
Global Strategist
Nick Granger
Portfolio Manager, Quantitative Analytics
Adam Gubner
Portfolio Manager, Distressed Debt
Gregory Hall
Head of U.S. Global Wealth Management
Mary Hoppe
Ray Huang
Portfolio Manager, Real Estate
Daniel H. Hyman
Head of Agency MBS Portfolio Management
Daniel J. Ivascyn
Group Chief Investment Officer
Mark R. Kiesel
CIO Global Credit
Erica Kinsella
Product Strategist, ESG Strategies
Kaboo Leung
Christine Long
Head of Retirement Marketing
Nicola Mai
Portfolio Manager, Sovereign Credit Analyst
Raji O. Manasseh
Equity Strategist
Jason Mandinach
Head of Alternative Credit and Private Strategies
Samuel Mary
ESG Research Analyst
Scott A. Mather
CIO U.S. Core and Sustainable Investments
Kyle McCarthy
Alternative Credit Strategist
Mohit Mittal
Portfolio Manager, Multi-Sector
Alfred T. Murata
Portfolio Manager, Mortgage Credit
John Murray
Portfolio Manager, Commercial Real Estate
John Nersesian
Head of Advisor Education
Roger Nieves
Senior Advisor
Jason Odom
Strategist, Asset Allocation
Rick Pagnani
Head of Insurance-Linked Securities
Sonali Pier
Portfolio Manager, Multi-Sector Credit
William Quinones
Product Strategist
Lupin Rahman
Head of EM Sovereign Credit
Libby Rodney
Steve A. Rodosky
Portfolio Manager, Real Return and Long Duration
Emmanuel Roman
Chief Executive Officer
Steve Sapra
Client Solutions & Analytics
Jerome M. Schneider
Head of Short-Term Portfolio Management
Marc P. Seidner
CIO Non-traditional Strategies
Emmanuel S. Sharef
Portfolio Manager, Asset Allocation and Multi Real Asset
Greg E. Sharenow
Portfolio Manager, Commodities and Real Assets
Anmol Sinha
Candice Stack
Head of Client Management, Americas
Kimberley Stafford
Global Head of Product Strategy
Cathy Stahl
Global Head of Marketing
Christian Stracke
Global Head of Credit Research
Geraldine Sundstrom
Portfolio Manager, Asset Allocation, EMEA
Richard Thaler
Distinguished Service Professor of Economics and Behavioral Science at the University of Chicago's Booth School of Business
Mark Thomas
Account Manager, Global Wealth Management
Jessica K. Tom
Senior Credit Analyst
Eve Tournier
Head of European Credit Portfolio Management
Francois Trausch
CEO and CIO, Allianz Real Estate
Jerry Tsai
Quantitative Research Analyst
Megan Walters
Global Head of Research, Allianz Real Estate
Qi Wang
CIO Portfolio Implementation
Jamie Weinstein
Portfolio Manager, Head of Corporate Special Situations
Tiffany Wilding
North American Economist
Andrew T. Wittkop
Portfolio Manager, Treasuries, Agencies, Rates
Nelson Yuan
Chris Brightman
Chief Executive Officer and Chief Investment Officer, Research Affiliates
Ben S. Bernanke
Chair, Global Advisory Board
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All
On Market Uncertainties, Bond Opportunities and the 60/40 Portfolio
PIMCO Education

Fixed Income Portfolios: Helping clients navigate volatility, inflation and rising rates(video)

Fixed Income Portfolios: Helping clients navigate volatility, inflation and rising rates

Delve into insights about fixed income in this rising-rate environment, including the potential benefits bonds bring to the table and how today’s higher yields while painful in the near-term can help long-term investors. Hosted by Roger Nieves, senior advisor on PIMCO’s Education Team. Interested in additional fixed income education to use in your practice? Visit

Does the 60-40 Portfolio Still Make Sense?
Economic and Market Commentary

Does the 60-40 Portfolio Still Make Sense?(video)

Does the 60-40 Portfolio Still Make Sense?

In this uncertain environment with increased inflation risk, portfolio construction will be key going forward, and we think investors should consider expanding the number of diversifiers in their portfolios.

More from this Asset Allocation Outlook

PIMCO’s Three-E Approach to ESG

Load more results Load {{cCtrl.fetchResults}} more results