how a leveraged loan index works
a leveraged loan is structured arranged through a process known as syndication loan syndication is the process of bringing together a group of lenders in funding various portions of a loan for a single borrower often to diversify the credit risk exposure of any single lender this version of a leveraged loan index is a common benchmark and represents the 100 largest and most liquid issues of the institutional loan universe the most popular leveraged loan index lli was developed by standard poor s s p and the loan syndications and trading association lsta 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 and credit suisse also maintain proprietary leveraged loan indexes leveraged loan indices in practicean 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 invesco 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 2 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 llis and cdsssome llis are tailored to derivatives products that utilize leveraged loans for instance the itraxx levx are a pair of two tradable indexes that hold credit default swaps cdss representing a diversified basket of the 40 formerly 35 most liquid european companies that have tradable debt offerings in the secondary market 3the levx indices track what are known as leveraged loan credit default swaps lcds the itraxx levx senior index represents only senior loans while the itraxx levx subordinated index represents subordinated debt including second and third lien loans 4