April 18, 2023
Guggenheim Second Quarter 2023 High-Yield and Bank Loan Outlook: The Pre-Recession Playbook for Up in Quality
NEW YORK, NY – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Second Quarter 2023 High-Yield and Bank Loan Outlook. Titled “The Pre-Recession Playbook for Up in Quality,” the report discusses why we foresee a bumpy ride over the course of 2023, which, in our view, is likely to offer opportunities to take advantage of excessive pessimism.
Among the highlights in the 16-page report:
- The market continues to struggle to differentiate credit risk, as evidenced by the lack of cross-industry spread dispersion. We view this as an opportunity for active management.
- A recession and higher rates pose challenges for the high-yield and bank loan markets, in which pessimism has risen. Issuer fundamentals, however, are far less bleak than current sentiment would indicate, but they show signs of softening.
- Lending standards are likely to continue tightening following the regional banking sector-related stresses, which portends higher default rates.
- Defaults have been rising and we believe they are on track to reach our 3.5 percent forecast for 2023.
- Interest coverage ratios and balance sheet cash remain robust but have declined ahead of a potential earnings recession. We expect coverage and leverage ratios to deteriorate further as the effect of tighter financial conditions takes its toll on the economy, causing corporate earnings to fall.
- We remain defensive and are staying up in quality in our portfolios, but the expression of this theme does not always translate into a preference for higher credit ratings, particularly when ratings are changing and are therefore less reliable.
- Other metrics we consider are debt seniority and business profile, which can sometimes make a B-rated credit more attractive than a BB-rated credit.
- Leveraged credit offers attractive pockets of relative value in names that have been oversold along with the broader market but that we view as cheap relative to underlying fundamentals.
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 $217 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 250+ 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 12.31.2022 and include leverage of $15.2bn. 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 Partners Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited, , Guggenheim Partners Japan 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 values 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. Investors in asset-backed securities, including mortgage-backed securities and collateralized loan obligations (“CLOs”), generally receive payments that are part interest and part return of principal. These payments may vary based on the rate loans are repaid. Some asset-backed securities may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity and valuation risk. CLOs bear similar risks to investing in loans directly, such as credit, interest rate, counterparty, prepayment, liquidity, and valuation risks. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.
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