May 17, 2019
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, NY – 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 loan, 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.
1Guggenheim Investments assets under management are 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.
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