With a 10 percent total return year to date, the best since 2009, leveraged loan performance has significantly outperformed other fixed income sectors. Performance can be attributed to several factors, including lack of duration risk, high coupons due to the Fed’s rate hikes, limited net issuance that supported loan prices and risk premiums, and the positive technical and fundamental impact of private credit. We anticipate this strong performance will persist throughout the remainder of 2023, concluding a strong return year.
While issuance has been constrained this year, it has gradually gained momentum, primarily directed toward refinancing activity. Of the $195 billion in institutional issuance, refinancing activity amounts to $112 billion, comprising 57 percent and on track to set a record. Subtracting refinancing activity from total issuance, net supply equals only $83 billion, which is about the same volume as U.S. CLO issuance this year. This leaves little leftover for other sources of demand, such as institutional separately managed accounts, and does not account for paydowns and defaults that shrink the market size without replacement. Consequently, demand exceeds supply, keeping discount margins under 580 basis points since the regional banking crisis in the first quarter.
The prominence of private lenders this year is particularly noteworthy due to the scarcity of syndicated loans. Data from Pitchbook LCD reveals that private lending has completed twice as many leveraged buyout activity debt transactions in the past few quarters compared to the syndicated loan market. Borrowers sometimes explore both the syndicated loan market and private lending channels to secure the best terms, and private lenders have stepped in on several notable occasions to assist distressed issuers, averting potential defaults. This activity has also helped support risk premiums in syndicated loans, and it is something we will keep monitoring.
Looking ahead, if interest rates remain elevated as the Fed has recently cautioned, we anticipate elements of performance in the next year that could resemble the second half of 2023: We believe the loan market will continue to offer an attractive coupon exceeding 8 percent, providing a potential buffer for overall returns. However, we also anticipate an increase in defaults and downgrades as more borrowers grapple with high interest expense levels while earnings growth decelerates. Maintaining a defensive stance remains crucial, but investors who have retained exposure to loans have been generously rewarded.
This material is distributed or presented for informational or educational purposes only and should not be considered a recommendation of any particular security, strategy or investment product, or as investing advice of any kind. This material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. The content contained herein is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation.
This material contains opinions of the authors, but not necessarily those of Guggenheim Partners, LLC or its subsidiaries. The opinions contained herein are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Information contained herein has been obtained from sources believed to be reliable but are not assured as to accuracy. Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information.
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.
Guggenheim Investments represents the following affiliated investment management businesses: 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.
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*Assets under management is as of 3.31.2024 and includes leverage of $14.5bn. 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 Corporate Funding, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners Japan Limited, and GS GAMMA Advisors, LLC.