May 20, 2020
Guggenheim Second Quarter 2020 High-Yield and Bank Loan Outlook: Reaching the End of the Runway
NEW YORK, NY – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Second Quarter 2020 High-Yield and Bank Loan Outlook. Titled “Reaching the End of the Runway,” the report discusses mounting risks facing high-yield corporate bonds and bank loans as the human and economic devastation of the coronavirus comes into focus.
Among the highlights in the 16-page report:
- High-yield bonds and bank loan markets are pricing in the damaging effects of the ongoing recession. Spreads widened to levels in March last seen in 2009, though both sectors could see more losses if spreads widen to 2008 peaks.
- While there is a lot of downside priced in, we expect the unemployment rate to rise above 20 percent, with output likely to contract by more in the first half of 2020 than was observed in the first two years of the Great Depression. Markets are assuming a quick recovery, but our interpretation of recent data is that conditions will be worse than what the market is pricing in.
- The high-yield corporate bond and bank loan markets both entered this downturn with weak earnings growth and a higher leverage ratio than in 2008. Tying together our economic and top-down credit views, we expect the U.S. speculative-grade default rate will reach 15 percent in this cycle; higher than the peaks in the 1990, 2002, and 2009 recessions.
- The average high-yield corporate leverage ratio was 3.5x in the third and fourth quarters of 2008. As of the fourth quarter of 2019, it is 4.7x. The average bank loan leverage ratio was 5.0x in the fourth quarter of 2008. As of the fourth quarter of 2019, it is 5.4x.
- In the search for survivors, liquidity is king. We have found opportunities in technology, non-cyclical consumer goods, healthcare, food and beverage, and some restaurants.
- A lot of downside is reflected in current price and spread levels, but more pain may come as economic data and corporate earnings reveal the extent of the damage COVID-19 has inflicted on the economy.
- Credit investors should use the recent reprieve brought on by a flood of stimulus programs to sell weak credits and buy likely survivors. The current market offers the opportunity to look for quality investments at better entry points than we have seen in years, so we are taking advantage of that value.
For more information, please visit www.guggenheiminvestments.com.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $213 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 295+ 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.
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $205 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 assets under management are as of 3.31.2020. The assets include leverage of $12.9bn 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 Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, GS GAMMA Advisors, LLC, 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.
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