Bank loans - whats the deal?

CFA Level II
#1

Hi Guys

I’ve heard conflicting things about bank loans.

  • In the CFA 2011 Mock exam they stated "bank loans are an attractive part of a capital structure. Bank Loans can enhance recovery values because they are senior in capital structure and generally secured by a lien on the firm’s assets, providing priority over other debt holders.

However in a schweser question:

  • High yield (speculative/junk ratings) issuers commonly rely on bank financing rather than capital markets (bonds). If a company has less bank debt it is more inclined that its debt is investment grade.

Whats the go? are bank loans good or not?

#2

CFAI is saying that b/c bank loans have seniority, they can be good for both borrowers (borrow at low rate) and lenders (have less risk). Schweser is saying the same thing but from another angle. Borrowers, i.e., issuers of junk bonds, borrow more cheaply from banks than going to the bond market. Banks will charge a high rate, but still that’s better than issuing 15% bonds.