High-Yield and Bank Loan Outlook: The Passing Storm

January 2016

High-Yield and Bank Loan Outlook The Passing Storm Investment Professionals B. Scott Minerd Chairman of Investments and Global Chief Investment Officer

As we kick off 2016, we also close a turbulent year for risk assets that saw the U.S. Federal Reserve’s first rate hike in the post-financial-crisis era. High-yield bonds and bank loans posted their first annual losses since 2009. High-yield spreads and bank loan discount margins widened by 184 basis points and 85 basis points over the year, respectively, to their widest levels since Standard & Poor’s downgraded

Jeffrey B. Abrams

the United States’ credit rating to AA+ from AAA in 2011. The S&P 500 experienced

Senior Managing Director,

its first 10 percent correction in four years and saw the weakest annual total return

Portfolio Manager

performance (+1.4 percent) since 2008.

Kevin H. Gundersen, CFA Senior Managing Director, Portfolio Manager

We continue to expect that defaults will remain largely contained to commodityrelated sectors despite the market’s dimming outlook for risk assets. While we keep a vigilant eye on the fundamental trends that underpin our credit views, it is important to remember during market conditions such as these that we are long-

Thomas J. Hauser

term investors, not traders. These are markets in which the strongest convictions

Managing Director,

are tested, but cooler heads prevail in the end.

Portfolio Manager Maria M. Giraldo, CFA Vice President, Investment Research

Report Highlights § The Credit Suisse High-Yield Bond and Leveraged Loan Indices posted losses

of 2.6 percent and 2.0 percent in Q4 2015, respectively, bringing annual returns to negative 4.9 percent and negative 0.38 percent, respectively—their worst performance since 2008. § As we expected, many of the challenges seen in 2015 originated in commodity-

sensitive sectors. Investors were spooked by steep declines in energy and metals prices, and a weakening global economic outlook, causing volatility to spill over into other sectors. § Outside of energy and metals, we continue to believe that many sectors offer

attractive valuations. Our analysis indicates that a positive story remains intact for a large number of issuers.

Guggenheim Investments

High-Yield and Bank Loan Outlook | Q4 2015

1

Leveraged Credit Scorecard As of December 31, 2015 High-Yield Bonds December 2014 Spread Yield

October 2015 Spread Yield

November 2015 Spread Yield

December 2015 Spread Yield

Credit Suisse High-Yield Index

564

7.10%

704

8.39%

680

8.39%

747

9.20%

Split BBB

250

4.16%

321

4.68%

294

4.60%

327

5.08%

BB

364

5.22%

490

6.35%

423

5.89%

462

6.38%

Split BB

462

6.16%

562

6.89%

502

6.53%

530

6.97%

B

600

7.34%

731

8.63%

674

8.30%

733

9.02%

CCC / Split CCC

1,009

11.54%

1,265

13.94%

1,410

15.74%

1,598

17.73%

Bank Loans December 2014 DMM* Price

October 2015 DMM* Price

November 2015 DMM* Price

December 2015 DMM* Price

Credit Suisse Leveraged Loan Index

558

96.28

581

94.33

623

92.69

643

91.43

Split BBB

328

99.03

314

99.16

320

98.94

307

98.95

BB

403

98.15

404

98.18

419

97.80

420

97.32

Split BB

506

97.71

510

97.68

572

95.38

544

95.90

B

619

96.44

647

95.15

681

94.09

728

92.05

1,044

94.26

1,268

86.17

1,383

83.73

1,512

79.83

CCC / Split CCC

Source: Credit Suisse. Split ratings shown use a single “blended” Moody’s/S&P rating to compute averages sorted by rating. Excludes split B because the split B loan index is heavily represented by one single corporate issuer. *Discount Margin to Maturity assumes three-year average life.

Credit Suisse High-Yield Index Returns

Credit Suisse Leveraged Loan Index Returns Q3 2015

0.4%

0.1%

-2.6%

-2.0%

-2.5%

-4%

-4.1%

-8.1% -10%

-4.0% -5.0%

-6%

-5.8%

-8% -9.8%

-12%

-8% -10% -12%

Index

Split BBB

BB

Split BB

B

CCC/Split CCC

Source: Credit Suisse. Data as of 12.31.15. Past performance is not indicative of future results.

2

-0.1% -0.4% -0.5% -1.4% -1.2% -2.1%

-2% -1.2% -2.0%

-3.3%

-5.2%

0.6% 0.2%

0%

-0.8%

-2%

-6%

Q4 2015

2%

0%

-4%

Q3 2015

Q4 2015

2%

High-Yield and Bank Loan Outlook | Q1 2016

Index

Split BBB

BB

Split BB

B

CCC/Split CCC

Source: Credit Suisse. Data as of 12.31.15. Past performance is not indicative of future results.

Guggenheim Investments

Macroeconomic Overview The Passing Storm On Dec. 16, 2015, the U.S. Federal Reserve (Fed) announced a 25-basis-point “There is a complete disconnect

increase in the federal funds target rate from a range of 0–25 basis points to a range

between reality and market

of 25–50 basis points. While the direct impact of such a move is fairly insignificant,

fundamentals. And we’ve had periods

the decision to commence the “normalization” of interest rates after seven years of

like this before. 1987 is probably one of

unprecedented liquidity provision is not. Indeed, in 2015 risk assets posted their

the most pronounced example of that,

worst annual performance since the 2008 financial crisis as market participants’

when the stock market declined about 25 percent in the course of two days.

If you were living it, you thought it was the end of the world. But the underlying

expectations for the start of rate hikes collided with concerns about plunging commodity prices, and slowing economic growth in China and other emergingmarket economies.

fundamentals were exceptionally good,

A number of other key events fueled the risk-off sentiment in the fourth quarter,

and the reality is that we were only

but three were particularly damaging to risk assets. The first was the release of the

living through a market dislocation.”

much stronger-than-expected U.S. employment report in early November, which

– Scott Minerd, Chairman of Investments and Global Chief Investment Officer

boosted the odds that the Fed would begin raising interest rates at its December meeting, and led to a pullback in risk assets after October’s strong rally.

The second event that brought out more bears to the market was the European Central Bank’s (ECB) announcement of new stimulus measures at its December meeting, which disappointed market expectations. Markets had priced in a 15–20 basis-point cut to the deposit rate, but the ECB delivered only a 10 basis-point cut to -30 basis points. Markets also expected the ECB to expand the size of its monthly asset purchases beyond the current €60 billion and extend purchases for up to another year, but it left the size unchanged and extended the duration by only six months. ECB President Mario Draghi attempted to calm markets by emphasizing the ECB’s willingness and ability to add more stimulus if needed, but the increased uncertainty caused a sharp appreciation of the euro and declines in stocks and bonds as crowded positions were unwound.

The third event was the December announcement by the Organization of Petroleum Exporting Countries (OPEC) that its members would continue to pump approximately 31.5 million barrels of crude oil per day. This underscored OPEC members’ commitment to their year-old strategy of defending their market share by squeezing out higher-cost producers, including U.S. shale. Oil prices tumbled, falling below $35 per barrel in December and reaching the lowest price since 2008.

There is no question that the energy sector is feeling the pain of the 65 percent decline in oil prices, which our internal models suggest may ultimately bottom around $25 per barrel. We are already seeing the consequences in the form of a wave of credit downgrades and a flurry of defaults, which we predicted in early 2015.

And as the following chart shows, average high-yield bond prices have been highly correlated with oil prices. As a result, we continue to believe that conditions will get worse for the energy sector before they get better, which portends further near-term volatility in the broader high-yield market.

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High-Yield and Bank Loan Outlook | Q1 2016

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Declining oil prices weighed on the high-yield bond market which

High-Yield Bonds Decline with Oil Average High-Yield Bond Prices (% of Par) vs. Oil Prices (WTI), Normalized to 100 as of Sept. 30, 2015

continues to have significant exposure

Average High-Yield Bond Prices (% of Par, LHS)

Oil Price (WTI, RHS)

to the energy sector. We expect the

103

115

relationship between high-yield bond

102

110

prices and oil prices will continue in

101

105

2016, which portends further volatility

100

100

99

95

98

90

in the near term.

97

85

96

80

95

75 70

94 5 5 15 15 15 0/1 10/7/1 14/ 0/21/ 0/28/ 9/3 1 10/ 1

/15 /11/15 18/15 25/15 /2/15 /9/15 16/15 23/15 30/15 11/4 12 12 11 11/ 11/ 12/ 12/ 12/

Source: Credit Suisse, Bloomberg. Data as of 12.30.15.

While clouds linger over some parts of the global economy, we believe the U.S. economic outlook remains bright. U.S. leading economic indicators continue to suggest there is no recession in sight, with the Conference Board U.S. Leading Economic Index rising by 3.4 percent year over year as of November 2015.

Consumer spending continues to lead the way, having risen by 3.2 percent in real terms in the year through Q3 2015, compared to 2.2 percent growth for the economy as a whole. As we highlighted in prior reports, declining energy prices are acting as a tax cut for consumers, which fuels spending elsewhere. And as the chart below illustrates, employers continue to add jobs at a robust pace outside of commodity-related sectors, indicating that the economy remains on sound footing.

Employers continue to add jobs at a robust pace outside of commodity-

Employment Growth Remains Strong Outside of Commodity Industries YoY Change in U.S. Payroll Employment (’000s)

related sectors, indicating that the economy remains on sound footing.

Private Sector ex Mining & Logging (LHS)

Mining & Logging (RHS)

Recession

5,000

250

4,000

200

3,000

150

2,000

100

1,000

50 0

0 -1,000

-50

-2,000

-100

-3,000

-150

-4,000

-200

-5,000

-250

-6,000

-300

-7,000 1980

-350 1985

1990

1995

2000

2005

2010

2015

Source: Haver, BLS, Guggenheim Investments. Data as of 12.30.15. Note: Mining includes oil and gas extraction and related activities.

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High-Yield and Bank Loan Outlook | Q1 2016

Guggenheim Investments

While the macroeconomic backdrop is still supportive for credit markets, the risk of contagion from distressed sectors, such as energy, bears watching.

As we’ll discuss in this report, a spillover into other areas of the credit markets is inevitable when short-term investors attempt to liquidate credit positions over a short period of time, particularly when secondary market liquidity is thin. However, a genuine turning point in credit will not be reached until a U.S. recession looms and underlying corporate fundamentals no longer support a low default environment—neither of which is true heading into 2016. Convictions are often tested in such turbulent markets, but these are also times when we must remember that we are long-term investors, not traders.

2015 Performance Recap The Oil Spillover Effect Following a fleeting rebound across risk assets in October, volatility rose in November and December and credit sold off as oil prices tumbled. High-yield bonds lost 2.6 percent and bank loans lost 2.0 percent in Q4 2015, bringing annual losses to 4.9 percent and 0.38 percent, respectively. At the industry level, the worst performers in 2015 were energy and metals, losing more than 20 percent in both high-yield bond and bank loan markets. The best performers were sectors tied to consumers, namely food and drug, and food and tobacco. These sectors delivered returns in excess of 4 percent in both leveraged credit markets.

Predictably, energy and metals were the worst performing industries in both

Consumer-Related Sectors Win While Commodity Sectors Lose Top 3 and Bottom 3 Sectors for High-Yield Bonds and Bank Loans, by 2015 Total Return

high-yield bond and bank loan markets in 2015. The winners were sectors more closely tied to the consumer which delivered positive returns for the year.

High-Yield Bonds 10% 5%

7.1%

5.3%

5.6%

4.4%

Bank Loans

4.7% 4.7%

0% -5% -10%

-10.0%

-15% -17.7%

-20% -25%

-23.8% -23.2%

-23.8% -27.1%

-30% Food/Drug

Food/Tobacco

Housing

Utility

Energy

Metals/Minerals

Source: Credit Suisse. Data as of 12.30.15.

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High-Yield and Bank Loan Outlook | Q1 2016

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The sell off that began with commodity-sensitive credits slowly spilled over into other sectors as investors redeemed holdings of high-yield mutual funds. For the year, net outflows from high-yield mutual funds totaled $16.5 billion according to Barclays Research, but outflows were particularly acute in the second half of 2015, with $11 billion withdrawn in only six months. The price impact of these outflows was exacerbated by poor market liquidity. As we warned previously, new regulations such as the Supplemental Leverage Ratio (SLR) and the Volcker Rule have reduced dealers’ willingness to intermediate customer flows in corporate credit markets as they used to. We are beginning to see what a market comprised mostly of sellers and few buyers looks like in a less liquid environment.

The consequences of poor liquidity are coming to light at a time when economic conditions are sound, so we believe this storm will pass. We see the current bear market in credit as principally a commodity story, although non-commodity sectors suffered in the second half of the year as a result of the spillover effect.

And while prognostications of a looming recession are causing investors to draw parallels to 2008, this is not a replay of the financial crisis. Average prices of non-commodity sectors in the high-yield corporate bond market are trading at 93 percent of par, on average, while commodity sectors are trading at only 60 percent of par, on average. In October 2008, every sector except utilities was trading below 80 percent of par, on average.

Volatility in the high-yield market has caused some investors to draw parallels

Price Volatility Still Concentrated in Commodity Sectors Average High-Yield Bond Prices (% of Par), Commodity vs. Non-Commodity Sectors

to 2008, but we believe we are far from

Commodity

the distress experienced at the height

105

of the financial crisis. Average prices of

100

non-commodity sectors in the high-yield corporate bond market are trading at 93 percent of par, on average. In October 2008, every sector except utilities

99.8

101.2

100.6

101.0

100.6

99.0

98.7

97.2

95.4

96.8

95 90 85

was trading below 80 percent of par,

80

on average.

75

86.6 82.5

84.4

87.0

87.5

Non-Commodity

94.9

85.4 80.2 74.4 70.3

70.9 67.9

70 65

60.2

60 55

92.6

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2015 Source: Credit Suisse, Guggenheim. Data as of 12.31.15.

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High-Yield and Bank Loan Outlook | Q1 2016

Guggenheim Investments

The relative stability of the bank loan market stood out against the volatility of the high-yield bond market earlier in the year, but loans eventually joined high-yield bonds in posting their first annual loss since 2008. In reviewing the loan market’s 2015 performance, it is difficult to attribute market weakness to a single cause.

In June, a weak global environment combined with the Fed’s decision to postpone raising interest rates weighed on the loan market as uncertainty grew over the timing of the first rate hike and future path for short-term rates. Loans rebounded in July, but heightened volatility across all risk assets in August led to the second negative monthly return for loans in 2015, from which they failed to recover through the end of the year. Loans recorded five consecutive months of negative returns between August and December 2015, the first such string since 2008.

A “Self-Check” Period in Leveraged Credit Markets In both high-yield bond and bank loan markets, higher quality outperformed lower quality in 2015. BB-rated bonds lost only 0.4 percent, compared to losses of 4.6 percent and 15.5 percent for B-rated bonds and CCC-rated bonds, respectively.

BB-rated loans managed to deliver a positive 2.6 percent return in 2015, versus losses of 0.2 percent and 6.1 percent for B-rated loans and CCC-rated loans, respectively.

The relative outperformance of higher-rated bonds and loans is consistent with our view that higher-quality high-yield offers better relative value as the market matures, a theme we highlighted in our July 2014 High-Yield and Bank Loan Outlook.

The theme of staying up in quality was also prevalent in the new issue market.

In the primary high-yield bond market, CCC-rated issuance accounted for 14 percent of total volume in 2015, down from 18 percent in 2014. In the loan market, CCCrated volume fell to only 3 percent of total primary market activity in 2015, down from 7 percent in 2014, while the share of BB-rated volume rose significantly to 39 percent in 2015, up from 27 percent in 2014.

It was also clear that overly leveraged borrowers struggled to raise additional debt in 2015, which many observers have attributed to the impact of stricter Leveraged Lending Guidelines issued in 2013. These guidelines, which constitute a regulatory framework that governs the underwriting and lending practices of banks in the leveraged loan market, were established by the Fed, the Office of the Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC).

One of the most constraining of these guidelines is an underwriting standard which characterizes leverage in excess of 6x (Total Debt/EBITDA) as a concern for most industries. Newly issued loans that do not meet this standard are subject to a high level of scrutiny by the regulators. In 2014, new issue loans with leverage above 6x represented 27 percent of total new issue activity, close to the 28 percent level seen in 2007. In 2015, loans originated with greater than 6x leverage dropped to 19 percent of total new issues. Ultimately, turbulent markets and investor skittishness resulted in only $260 billion of loans being issued in the primary market in 2015, down 31 percent from 2014 volumes.

Guggenheim Investments

High-Yield and Bank Loan Outlook | Q1 2016

7

in 2015 were 31 percent lower than 2014

Share of New Loans with >6x Leverage Decline in 2015 Newly Issued Loans with Greater than 6x Leverage

volume as investors grew wary of risk.

30%

New issue volumes in the loan market

In addition to lower issuance of deals rated CCC or lower compared to the prior year, only 19 percent of loans were originated with greater than 6x leverage—well below the 27 percent share of such deals in 2014. This trend reversal suggests that regulatory efforts to curb highly levered transactions have been successful.

28%

27%

25% 20%

19%

18%

16%

14%

15%

16%

16%

2012

2013

11%

10%

6%

5% 0% 2006

2007

2008

2009

2010

2011

2014

2015

Source: S&P LCD. Data as of 12.31.15.

Limited access to capital and investors’ avoidance of lower quality signaled the end of the last credit cycle, which ultimately led to a 14.7 percent twelve-month trailing speculative-grade default rate in 2009. Given stronger underlying fundamentals in current credit markets against a still-improving U.S. economy, we consider the events of 2015 a “market self-check.” There was no such pause in 2006 and 2007.

With the ability to earn more attractive spreads in the current environment, the opportunity has arisen for us to extend credit to creditworthy firms at more attractive spreads and with stronger covenants for our clients. These are benefits awarded to lenders that perform the rigorous due diligence required to reach an informed credit opinion and breathe life to a properly underwritten bond or loan. Therein lies the difference between long-term investors and “fast money” searching for yield or a quick profit.

Trends Beneath the Surface Applying Lessons Learned from Energy The general trends that affected the leveraged credit markets in 2015—namely poor liquidity conditions and an aversion to the lowest quality credits—may continue to sporadically impact market performance through the Fed tightening cycle.

Against a weakening technical backdrop, we’ve been managing liquidity carefully but continue to see opportunities based on the underlying fundamentals.

Recognizing that not all industries will perform similarly during the more advanced stages of the credit cycle, we regularly evaluate industry trends and scrutinize

8

High-Yield and Bank Loan Outlook | Q1 2016

Guggenheim Investments

fundamentals at the individual security level in order to position portfolios away from looming risks. The outcome in certain cases can be a vastly different industry allocation than a passive, indexed strategy. The differences may arise for many reasons, including growing idiosyncratic risks or macro trends that are likely to affect one industry more than another.

Moreover, investors in a passively managed indexed strategy will have highly concentrated exposures to industries with the greatest amount of debt outstanding, which is not a recipe for attractive risk-adjusted returns. Energy, for example, held the second-highest market share in the high-yield market before the beginning of the oil bear market in July 2014, a concentration risk that could have been avoided by monitoring capital flows and debt growth. Between December 2008 and December 2013, the face value of energy high-yield bonds outstanding grew by 181 percent, far outpacing the 69 percent growth of the high-yield bond market excluding energy over the same time period. The growing weight of the energy sector was a forewarning of the broader high-yield market’s increased vulnerability to falling oil prices.

In 2015, a significant amount of capital was channeled to the healthcare sector.

Healthcare ranks second in industries that issued high-yield bonds and bank loans in 2015, and it has now become the second-largest industry in leveraged credit with a combined face value of $209 billion in high-yield bonds and loans outstanding. This represents 11 percent of the total leveraged credit market, trailing only the 17 percent market share of media and telecommunications.

While the healthcare and energy sectors face very different risks, the lesson of the energy sector’s recent travails is that investors should tread carefully where too much capital is flowing. As investors look for end-of-cycle opportunities, they may be seeking refuge in areas traditionally considered safe, but we believe concentration risks are building even as credit metrics are deteriorating. As the following chart shows, high-yield borrowers in healthcare are currently servicing $8 billion in annual interest expense in aggregate, which is nearly double their aggregate annual interest expense in the third quarter of 2008. This trend is fairly similar to high-yield energy, where borrowers are currently servicing $10 billion in aggregate annual interest expense—more than 2.5 times the aggregate annual interest expense in the third quarter of 2008, highlighting one of various reasons why the worst is not over for energy. Of course, these figures do not control for other factors, namely strong earnings growth or an increase in the number of borrowers within the industry. Nevertheless, a higher industry-level interest debt burden makes it more vulnerable to an industry-wide deterioration in earnings, as showcased recently by energy.

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High-Yield and Bank Loan Outlook | Q1 2016

9

We see risks growing in the healthcare sector, which is currently servicing nearly

Industry-Level Annual Interest Expense 12-Month Trailing Interest Expense, by Industry, Q3 2015 vs. Q3 2008

twice the total annual interest expense

$12,000

versus 2008. As debt and interest increasingly vulnerable to a reversal in the macroeconomic backdrop or other exogenous factors. The same risk is not evident in most other sectors which have maintained or even cut annual interest costs from 2008 levels.

Energy Trailing 12-Month Interest Expense (Q3 2015)

costs grow, the industry becomes

$10,000

Telecom Healthcare

$8,000 $6,000 $4,000 $2,000 $0

$0

$2,000

$6,000 $8,000 $4,000 Trailing 12-Month Interest Expense (Q3 2008)

$10,000

$12,000

Source: Bank of America Merrill Lynch Research, Guggenheim. Data as of 9.30.2015. Other industries include: Automotive, capital goods, commercial services, consumer products, food, gaming, hotels & leisure, materials, media, real estate, retail, technology, transportation, and utilities.

We have been very selective in healthcare, specifically in pharmaceuticals, a result supported by our independent bottom-up credit work, as well as our top-down view.

Energy and healthcare are two examples of how active credit management can yield different positioning relative to an index strategy, resulting in attractive risk-adjusted returns over time.

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High-Yield and Bank Loan Outlook | Q1 2016

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Important Notices and Disclosures INDEX AND OTHER DEFINITIONS The referenced indices are unmanaged and not available for direct investment. Index performance does not reflect transaction costs, fees or expenses.

The Credit Suisse Leveraged Loan Index tracks the investable market of the U.S. dollar denominated leveraged loan market. It consists of issues rated “5B” or lower, meaning that the highest rated issues included in this index are Moody’s/S&P ratings of Baa1/BB+ or Ba1/ BBB+. All loans are funded term loans with a tenor of at least one year and are made by issuers domiciled in developed countries.

The Credit Suisse High Yield Index is designed to mirror the investable universe of the $US-denominated high yield debt market.

The S&P 500 Index is a capitalization-weighted index of 500 stocks, actively traded in the U.S., designed to measure the performance of the broad economy, representing all major industries.

The Barclays Investment-Grade Corporate Bond Index covers USD-denominated, investment grade, and fixed-rate, taxable securities sold by industrial, utility, and financial issuers.

The Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities.

The BofA Merrill Lynch Core Fixed Rate Preferred Securities Index tracks the performance of fixed rate US dollar denominated preferred securities issued in the US domestic market.

Spread is the difference in yield to a Treasury bond of comparable maturity.

A basis point (bps) is a unit of measure used to describe the percentage change in the value or rate of an instrument. One basis point is equivalent to 0.01%.

Discount margin to maturity (dmm) is the return earned at maturity that is over and above a specific reference rate associated with some type of floating rate security. Discount margin to maturity assumes three year average life. Spreads and discount margin to maturity figures shown throughout this piece are expressed in basis points.

RISK CONSIDERATIONS Fixed-income investments are subject to credit, liquidity, interest rate and, depending on the instrument, counter-party risk. These risks may be increased to the extent fixed-income investments are concentrated in any one issuer, industry, region or country. The market value of fixed-income investments generally will fluctuate with, among other things, the financial condition of the obligors on the underlying debt obligations or, with respect to synthetic securities, of the obligors on or issuers of the reference obligations, general economic conditions, the condition of certain financial markets, political events, developments or trends in any particular industry and changes in prevailing interest rates. Investing in bank loans involves particular risks.

Bank loans may become nonperforming or impaired for a variety of reasons. Nonperforming or impaired loans may require substantial workout negotiations or restructuring that may entail, among other things, a substantial reduction in the interest rate and/or a substantial write down of the principal of the loan. In addition, certain bank loans are highly customized and, thus, may not be purchased or sold as easily as publicly-traded securities. Any secondary trading market also may be limited, and there can be no assurance that an adequate degree of liquidity will be maintained. The transferability of certain bank loans may be restricted. Risks associated with bank loans include the fact that prepayments may generally occur at any time without premium or penalty. High-yield debt securities have greater credit and liquidity risk than investment grade obligations.

High-yield debt securities are generally unsecured and may be subordinated to certain other obligations of the issuer thereof. The lower rating of high-yield debt securities and below investment grade loans reflects a greater possibility that adverse changes in the financial condition of an issuer or in general economic conditions, or both, may impair the ability of the issuer thereof to make payments of principal or interest. Securities rated below investment grade are commonly referred to as “junk bonds.” Risks of high-yield debt securities may include (among others): (i) limited liquidity and secondary market support, (ii) substantial market place volatility resulting from changes in prevailing interest rates, (iii) the possibility that earnings of the high-yield debt security issuer may be insufficient to meet its debt service, and (iv) the declining creditworthiness and potential for insolvency of the issuer of such high-yield debt securities during periods of rising interest rates and/ or economic downturn. An economic downturn or an increase in interest rates could severely disrupt the market for high-yield debt securities and adversely affect the value of outstanding high-yield debt securities and the ability of the issuers thereof to repay principal and interest. Issuers of high-yield debt securities may be highly leveraged and may not have available to them more traditional methods of financing.

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.

This article is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer of solicitation with respect to the purchase or sale of any investment.

This article should not be considered research nor is the article intended to provide a sufficient basis on which to make an investment decision. The article contains opinions of the author but not necessarily those of Guggenheim Partners, LLC, its subsidiaries, or its affiliates. Although the information presented herein has been obtained from and is based upon sources Guggenheim Partners, LLC, believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. 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 is not guaranteed as to accuracy.

This article may be provided to certain investors by FINRA licensed broker-dealers affiliated with Guggenheim Partners, LLC. Such broker-dealers may have positions in financial instruments mentioned in the article, may have acquired such positions at prices no longer available, and may make recommendations different from or adverse to the interests of the recipient.

The value of any financial instruments or markets mentioned in the article can fall, as well as rise. Securities mentioned are for illustrative purposes only and are neither a recommendation nor an endorsement. Individuals and institutions outside of the United States are subject to securities and tax regulations within their applicable jurisdictions and should consult with their advisors as appropriate.

Guggenheim Funds Distributors, LLC, Member FINRA/SIPC, is an affiliate of Guggenheim Partners, LLC. Guggenheim Investments total asset figure is as of 09.30.2015. The assets include leverage of $11.8bn for assets under management and $0.5bn for assets for which we provide administrative services. Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.

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Guggenheim Partners’ assets under management are as of 9.30.2015 and include consulting services for clients whose assets are valued at approximately $48bn.

©2016, Guggenheim Partners, LLC. 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. Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim Partners, LLC and Guggenheim Investments. For information, call 800.345.7999 or 800.820.0888.

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Guggenheim Partners is a global investment and advisory firm with more than

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$240 billion2 in assets under management. Across our three primary businesses of investment management, investment banking, and insurance services, we have a track record of delivering results through innovative solutions. With 2,500 professionals based in more than 25 offices around the world, our commitment is to advance the strategic interests of our clients and to deliver long-term results with excellence and integrity. We invite you to learn more about our expertise and values by visiting GuggenheimPartners.com and following us on Twitter at twitter.com/guggenheimptnrs.