Structure Matters: Elon Musk Tapping the Senior Loan Market

Will Elon Musk close the $44 billion Twitter deal before Halloween? It is scheduled to close by Friday, October 28th. How many folks are planning to dress up as Elon Musk, or even a new Tesla, for Halloween? Oh, so much drama, and for what? Elon says he is excited about closing the deal, despite arguably overpaying, possibly needing to sell billions more of Tesla stock, and rumors of massive layoffs at the firm. Many of the banks involved plan to retain $13 billion of the bank loan that Elon needs to fund the deal, probably through at least the end of 2022. This is arguably due to tight supply of this fixed income cap structure, and it can be lined up well with other areas of a large institution’s liability structure.

Senior Loans: Active vs Passive

All this brings us back to this question: What is happening in the bank loan market? There are 6 bank loan ETFs, 4 of which are actively managed. AUM for the category totals $13.458 billion, with an average fee of 62.5 BPS. On a long-term basis, it would seem logical to believe that active would outperform in this space due to the ability to source liquidity in the primary and secondary market on a timely basis, rather than simply on a systematic basis. A key difference between most of these funds is the number of holdings. There are 533 holdings in SPDR Blackstone Fund (SRLN), versus 133 holdings in the Invesco Senior Loan fund (BKLN). This could mean that Twitter bonds could end up in one of the active funds as a “Trick or Treat!” Beyond SRLN and BKLN, the First Trust Senior Loan Fund (FTSL) is active and has a solid third place position with $3 billion AUM and 199 holdings. We exclude two newer funds in the first chart (Virtus SEIX Loan ETF (SEIX) and Pacer Pacific Floating Rate High Income ETF (FLRT)) to illustrate how the group has performed on a long-term basis. We also include a helpful interview with Gordon McKemie, Portfolio Manager of the SPDR Blackstone Fund, that is displayed on the ETF Think Tank YouTube Channel with some further information from the ETF Think Tank Tool.

How to Monitor this Fixed Income Category

We think this area of the fixed income market needs to be monitored closely given its role on M&A, bank balance sheets, and its correlation to high yield. It is also important to highlight that this category is known to be correlated with inflation, even though inflation has been absent for so many years. Hence, there may be no surprise that in its latest monthly dividend, SRLN raised its dividend payment sequentially by about 10% to $0.22 from $0.20. This space, nevertheless, is not without challenges. while many of the banks reported low exposure to the category in this third quarter, Citigroup reported a $110 million markdown which, overall, was better than the write down of about $1 billion across the banking sector in the previous second quarter. We hope to learn more about the overall health of this category during our ETF Think Tank Happy Hour on November 3rd with Lee Shaiman. Currently, Lee is the Executive Director of the Loan Syndication and Trading Association (LSTA), but he was previously the lead Portfolio Manager of SRLN when it originally was launched. The LSTA is a leading industry resource of information about syndicated lending. Given Lee’s experience, we hope to gain a great deal of constructive insights relating to market liquidity, deal spreads, and how the Twitter deal worked out.


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