February 11, 2020
The Relative Value Case for Bank Loans Over High Yield
NEW YORK, NY – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its First Quarter 2020 High-Yield and Bank Loan Outlook. Titled “The Relative Value Case for Bank Loans Over High Yield," discusses the investment merits of leveraged loans and high-yield corporate bonds.
Among the highlights in the 16-page report:
- While we still prefer higher-rated over lower-rated debt, our First Quarter High-Yield and Bank Loan Outlook focuses on the opportunity to move up in quality within the corporate capital structure, preferring senior secured loans over senior unsecured high yield bonds of comparable ratings based on both yields and loss-adjusted spreads.
- The opportunity in senior secured bank loans is not without risk, but there are plenty of higher-quality borrowers that will survive the next downturn. While it remains prudent to stay defensive, some areas of the bank loan market offer such an opportunity.
- The outperformance of high quality over low quality in 2019 highlights the realities within credit, namely that fundamentals are deteriorating rapidly at this late stage in the business cycle, and it is important to distinguish between haves and have-nots.
- For investors looking for ways to upgrade quality in leveraged credit, loans present a good opportunity to move up the capital structure while still earning better spreads and yields than unsecured corporates. Nevertheless, investors should be aware of refinancing risk in BB loans and downgrade risk in single B loans.
- We estimate that the high-yield corporate bond market offers a loss-adjusted spread of only 62 basis points compared to 274 basis points in bank loans.
- Economic data suggest the Federal Reserve has successfully pushed off a recession. After tightening notably at the end of 2019, we expect credit spreads to move sideways over the next quarter, with possible widening resulting from the coronavirus outbreak.
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.
1Guggenheim Investments assets under management are as of 9.30.2019. The assets include leverage of $11.8bn 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.
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.
One basis point is equal to 0.01 percent.
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