July 19, 2023
Guggenheim Third Quarter 2023 High-Yield and Bank Loan Outlook: Capital Rationing in Leveraged Credit
NEW YORK, NY – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Third Quarter 2023 High-Yield and Bank Loan Outlook. Titled “Capital Rationing in Leveraged Credit,” the report discusses why we believe that high-yield corporate bonds and bank loans continue to offer compelling opportunities, but navigating the current credit environment requires careful monitoring of credit quality, industry disparities, and the impact of tight monetary policy.
Among the highlights in the 16-page report:
- The leveraged credit market is experiencing two contrasting trends: 1) aggregate credit fundamentals are in line with or better than historical levels, but 2) concern about the trajectory of fundamentals have led to downgrades outpacing upgrades at the fastest pace since 2020.
- This situation is giving rise to a process of capital rationing in the primary market, evidenced by large declines in debt issuance and shifts across industries and structures.
- While a healthy market typically sees leveraged credit primary market volume equal to at least 25 percent of the amount outstanding, this year it is tracking just 14 percent for the year. Lack of issuance typically portends higher defaults.
- The 12-month issuer-weighted bank loan default rate more than doubled from the end of 2022 to end of May 2023. The high-yield corporate bond default rate also increased. However, both remain below historical averages.
- Both the corporate bond and bank loan sectors experienced a higher proportion of downgrades to upgrades, resulting in a negative net migration rate between March and May.
- We anticipate the momentum of negative rating migration to persist.
- The challenge for investors lies in the potential volatility of spreads and prices as the Fed nears its 2 percent inflation target and the labor market weakens enough to support rate cuts.
- This volatility will present a valuable buying opportunity, making it sensible to maintain some dry powder for when the opportunity arises.
- Investors should concentrate on stable opportunities and remain mindful of the potential risks associated with capital rationing and increasing defaults.
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About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $224 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.
Media Contact
Gerard Carney
Guggenheim Partners
310.871.9208
Gerard.Carney@guggenheimpartners.com
1Guggenheim Investments assets under management are as of 3.31.2023 and include leverage of $14.7bn. 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.
Dry powder refers to highly liquid assets, such as cash or money market instruments, that can be invested when more attractive investment opportunities arise.
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