April 12, 2018
Guggenheim Second-Quarter 2018 High-Yield and Bank Loan Outlook: Not Too Soon to Think About Defaults and Recovery Rates
NEW YORK – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Second Quarter 2018 High-Yield and Bank Loan Outlook.
Among the highlights in the 12-page report:
- The current low-default environment supports near-term value in high-yield corporate bonds and bank loans. The support is especially true for bank loans, which have outperformed high-yield corporate bonds year to date with higher London interbank offered rates (Libor) translating into more attractive floating coupons.
- However, the benign credit backdrop will not exist indefinitely. As the Federal Reserve tightens monetary policy further, we expect to see default rates higher in 2019 and 2020.
- Guggenheim research shows that when short-term rates approach 3 percent, funding costs will put pressure on corporate borrowers’ ability to pay debt service on existing liabilities.
- It would not take many corporate defaults to push the trailing default rate higher, evidenced by the impact of iHeartMedia’s skipped interest payment on the leveraged loan default rate.
- The average recovery rate during a recession tends to be lower than the historical average. Guggenheim estimates the next recession will occur late 2019 to mid-2020.
- U.S. corporate liabilities stand at an all-time high of 100 percent of GDP, exposing the economy to a rise in corporate borrowing costs or a decline in corporate earnings. The next downturn will be traced back to the corporate debt market.
- Investors should focus on senior secured debt, avoid issuers that have defaulted in the past, and focus on issuers with high-quality assets that may retain value in the event of liquidation.
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 $250 billion¹ in 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 and attractive long-term results.
1Guggenheim Investments total asset figure is as of 12.31.2017. The assets include leverage of $12.1bn for assets under management and $0.4bn for assets for which we provide administrative services. Guggenheim Investments represents the following affiliated investment management businesses: 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. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment grade bonds and may be subject to greater volatility. Investments in bank loans securities involve special types of risks, including credit risk, interest rate risk, liquidity risk and prepayment risk.
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