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Guggenheim Second Quarter 2019 High-Yield and Bank Loan Outlook: Credit Metrics Show That with Recession on the Horizon Defaults to Ramp Up in 2021, But Volatility Should Strike Sooner

NEW YORK, May 17, 2019 (GLOBE NEWSWIRE) -- Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Second Quarter 2019 High-Yield and Bank Loan Outlook. Entitled “Quantifying the Credit Risk and Default Runway,” the report reflects the outlook for leveraged finance within the context of monetary policy, the business cycle, and financial condition of the sector issuers.

Among the highlights in the 16-page report:

  • Bank loan mutual fund outflows coupled with a shift in issuance to secured bonds led to lower issuance levels in the loan market. Given waning demand for loans, institutional loan issuers migrated to the high-yield corporate bond market this year.

  • Despite attracting loan issuers to the high-yield primary market, bond issuance is down 3 percent on a year-over-year basis.

  • A lack of new supply contributed to one of the best first quarters for performance in the leveraged credit market on record. High-yield corporate bonds delivered 7.4 percent total return and 5.7 percent excess return in the first quarter of 2019, and bank loans delivered 3.8 percent total return and 3.1 percent excess return over the same period.

  • Comparing the high-yield corporate bond and bank loan market side by side, we find that high-yield corporate bond issuers are marginally better positioned to avoid default in a recession based on leverage ratios only, but comparable based on interest coverage.

  • The indicators we track as part of our U.S. Recession Dashboard continue to evolve as if we are heading into a recession in roughly a year, reinforcing our longstanding view that we should prepare for the next recession beginning as early as the first half of 2020.

  • If a recession were to begin today, healthy interest coverage of 4.3x may give both sectors at least a 12-month runway before default volume increased meaningfully.

  • In the event of a default, an important consideration is how much a lender should expect to recover. First-lien loan investors have historically recovered 70 percent of their principal following a default, on average. But debt cushions have declined from an average of 30 percent in 2007 to 20 percent in 2018.

  • Keeping in mind that market pricing will reflect expected defaults in advance, we continue to implement our view of staying up in credit quality, considering both fundamentals and relative value, with the aim of avoiding the magnitude of spread widening that has occurred in past recessionary environments.

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About Guggenheim Investments

Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $209 billion1 in total assets across fixed income, equity, and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers, and high-net-worth investors. Our 300+ investment professionals perform rigorous research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification opportunities and attractive long-term results.

1. Guggenheim Investments total asset figure is as of 3.31.2019. The assets include leverage of $11.3bn for assets under management. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.

Investing involves risk, including the possible loss of principal. Investments in fixed-income instruments are subject to the possibility that interest rates could rise, causing their value to decline. High-yield and unrated debt securities are at a greater risk of default than investment grade bonds and may be less liquid, which may increase volatility.

This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.

This material contains opinions of the author, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. No part of this material may be reproduced or referred to in any form, without express written permission of Guggenheim Partners, LLC.

Media Contact
Gerard Carney
Guggenheim Partners

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