July 18, 2018
Guggenheim Third-Quarter 2018 High-Yield and Bank Loan Outlook: Late-Cycle Boom Conditions Persist, but Challenges Are Clear
NEW YORK, NY – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Third Quarter 2018 High-Yield and Bank Loan Outlook.
Among the highlights in the 12-page report:
- Highly leveraged corporate borrowers are thriving in the current environment. Earnings growth accelerated to 18 percent year over year in the first quarter 2018 for high-yield corporate bond issuers. Bank loan issuer earnings growth was also strong at 9 percent. Defaults have declined, leverage ratios have improved, and coverage is healthy.
- The Federal Reserve’s confidence in the U.S. economy has sharpened in recent weeks. Nevertheless, geopolitical risk continues to weigh on the market, as positive headlines are offset by the trade war launched by the United States.
- The late-cycle fiscal boost is stoking more investor complacency in the institutional loan market. Recent primary market trends are reminiscent of 2006 and 2007 activity, when heavy activity related to mergers, acquisitions (M&A) and leveraged buyouts (LBO) preceded the financial crisis.
- Higher M&A and LBO volume is typically accompanied by higher leverage multiples. An increasing share of loans are being issued with 6x or greater leverage multiples, adding risk to a market that for the first time may experience a credit cycle turn without much covenant protection.
- Although we are not seeing the same level of M&A and LBO activity in the high-yield corporate bond market, it is not entirely immune due to M&A volume in the investment-grade corporate debt market. Fallen angels may create price dislocations in the future.
- Given little dispersion in pricing, increasingly similar credit profiles, and a convergence in covenant protection between the high-yield and the bank loan markets, we believe opportunities are beginning to look equally attractive in both sectors, but this remains a credit-picker’s market.
For more information, please visit http://www.guggenheiminvestments.com.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $246 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 3.31.2018 and include leverage of $12.2bn. In April 2018, Guggenheim Investments closed the sale of the firm’s Exchange Traded Fund (“ETF”) business representing $38.6bn in assets under management, which will be reflected in the June 30, 2018 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, Guggenheim Real Estate, 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.
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