Think about what they are selling you...a floating rate note, or so they claim.
Previous to 08-09, that was largely true as Loans did float at 3mos Libor (which goes up and down every day...or used to..as it has been stuck at ~25bps for a long time).
However, what changed a few years ago was that no one wanted to buy Loans with 3mos Libor that was so low (25-50bps) and had little chance of actually increasing. So they devised what are called, "Libor Floors" which effectively give you a minimum level of coupon (typically 1.00%) and then you get the coupon spread (~300bps) on top. That gets you a coupon of roughly 4.00%. Or does it? It is important to note that this Libor Floor (1.00%) acts as a Fixed Rate coupon, as long as 3mos Libor stays below the Floor. Loans with Libor Floors only Float if 3mos Libor rises above the Floor.
Ok so now you own a Lev Loan thatt looks like this:
1. Libor Floor at 1.00%
2. Coupon Spread of 3.00%
3. Total coupon of 4.00% (Fixed unless 3mos Libor rises above 1.00%)
Well, given the Libor Floor of 1.00%, one now needs to ask when Libor is going to rise from its current level of ~25bps to more than 1.00% so you can actually start to benefit from the "floating" rate aspect of these Lev Loans.
Well if you have been following what the FOMC and BoC have been saying, we are unlikely to get a taper of monthly bond purchases out of the Fed any time soon and the BoC just downgraded their economic outlook rather significantly. Now on that news, longer term rates like 10yrs, rallied rather well the past week or two. 3mos Libor is still stuck at .25%.
So when do you think the Fed will:
a) start to taper monthly bond purchases?
b) finish tapering monthly bond purchases so they are buying Zero?
c) start hiking overnight Fed Funds and the Discount Rate which will start moving 3mos Libor higher?
d) and when will 3mos Libor finally hit and get significantly beyond 1.00% where the Libor Floor sits?
I think the answers to all of the questions is:
a) 2yrs, if ever
b) 4yrs, if ever
c) 5yrs, if ever
d) 10yrs, if ever
Why do I take such a draconian view? Economic growth is declining, inflation is declining, and USA politics are a complete mess. The Fed and US Gov't are in a rock and a hard place where both are stretched way too far. Neither fiscal nor monetary policy have led to much of an economic or inflation recovery in 5yrs. The Gov't has no room left for stimulus and althought the Fed's balance sheet is theoretically infinite, ever the most ardent monetarists would have to agree it is rather stretched...and besides, rates can't really go lower.
On inflation, we do have asset price inflation but I think all that does is create bubbles. Bubbles burst on their own when there isn't a marginal buyer left. Greater fool theory. (I am talking about the stock market specifically here).
So, to conclude, there is a place for some Lev Loans in a portfolio...they are senior secured after all (but make sure what that security level is...is it 1st Lien or 2nd Lien??). They also help dampen out volatility in a portfolio. Just don't expect to receive any protection from rising rates for quite some time. To be sure, what you own is a low fixed rate coupon that may never Float and may very well be a Fixed Rate Coupon for the entire life of that Loan.