/perspectives/sector-views/high-yield-and-bank-loan-outlook-may-2019

Quantifying the Credit Risk and Default Runway

After the recession starts, high-yield bond and bank loan issuers have at least a 12-month runway before we experience a large wave of defaults.

May 17, 2019


High-Yield and Bank Loan Outlook Report

Second Quarter 2019

Here are the key takeaways from our latest High-Yield and Bank Loan Outlook report:

  • Bank loan mutual fund outflows coupled with a shift in issuance to secured bonds led to lower issuance levels in the loan market.
  • A lack of new supply contributed to one of the best quarters for performance in the leverage credit market on record.
  • Comparing the high-yield corporate bond and bank loan market side by side, we find that high-yield corporate bond issuers are marginally better positioned to avoid default in a recession based on leverage ratios only, but comparable based on interest coverage.
  • If a recession were to begin today, healthy interest coverage of 4.3x may give both sectors at least a 12-month runway before default volume increased meaningfully.
  • Keeping in mind that market pricing will reflect expected defaults in advance, we continue to implement our view of staying up in credit quality, considering both fundamentals and relative value, with the aim of avoiding the magnitude of spread widening that has occurred in past recessionary environments.
 
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This material contains opinions of the author but not necessarily those of Guggenheim Partners or its subsidiaries. The author’s opinions 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. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. 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. Loans are often below investment grade, may be unrated, and typically offer a fixed or floating interest rate.

 


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