Q2 2024 High Yield & Bank Loan Outlook

Thomas

Maria

Summary

The landscape for high yield corporate bonds and bank loans in 2024, markedly influenced by an uptick in U.S. economic growth forecasts and capital availability, is supporting strong investor optimism. However, this positive outlook is set against a backdrop of tight credit spreads, creating a complex risk-reward environment for some investors. A critical task for investors is to look beyond the improved growth outlook and evaluate default risks and recovery prospects for every security. This report delves into these dynamics, highlighting the importance of a nuanced approach to defaults and recoveries in navigating opportunity and risk in leveraged credit.

Highlights from the Report

ƒ High yield bonds returned 1.5 percent in the first quarter of 2024, but bank loans outperformed at 2.5 percent, reflecting the sector’s limited rate sensitivity and potential for additional upside given higher risk premiums.

ƒ Total quarterly issuance volume, including refinancing activity, reached $230 billion, marking the highest level since the third quarter of 2021, and demonstrating robust capital availability and market activity.

ƒ Defaults have continued at a similar pace to 2023, indicating that despite an improved economic outlook, the risk of defaults remains a critical consideration for investors in high yield bonds and bank loans.

ƒ While the improved economic outlook suggests potential for recovery rates to rise, expectations differ between high yield bonds and bank loans, highlighting the need for investors to navigate these sectors with tailored strategies.

Leveraged Credit Scorecard

As of 3.31.2024

Source: ICE BofA, Credit Suisse. *Discount Margin to Maturity assumes three-year average life. Past performance does not guarantee future results.

ICE BofA High Yield Index Returns

Credit Suisse Leveraged Loan Index Returns

While the credit landscape is thawing, our assessment of some economic data continues to point to conditions that may not be as robust as they are widely perceived to be.

Macroeconomic Outlook

Investor’s Guide to Unraveling Default and Recovery Dynamics

The economy has weathered a negative credit impulse (i.e. the slowdown in credit growth) brought on by higher rates over the past two years, which historically would have led to an economic contraction and a rise in the unemployment rate. The most likely explanation for why this didn’t happen is that a rolling recession dynamic prevented the pain from being concentrated over any specific period that would have resulted in an acute stress for the labor market. Nonetheless, indicators we track suggest credit conditions are now at an inflection point and moving in a positive direction over the next several months as credit availability gradually recovers. The Federal Reserve’s (Fed) quarterly Senior Loan Officer Opinion survey shows that fewer banks are tightening their standards for lending compared to two quarters ago, and lending activity has picked up in capital markets as well.

Consensus expectations for U.S. economic growth in 2024 have notably improved over the past six months, with U.S. gross domestic product (GDP) forecasts rising from 1 percent to 2.2 percent. This uptick largely stems from the observation that consumption has remained resilient and is being powered further by easing financial conditions that typically drive more business investment as well. Those conditions include lower rates compared to last year’s peak, narrow credit spreads, and a surging equity market, all of which boost sentiment and could spark renewed activity.

While the credit landscape is thawing, our assessment of some economic data continues to point to conditions that may not be as robust as they are widely perceived to be. One example is the labor market: While average monthly nonfarm payroll gains of 230,000 since September paint a robust picture of hiring, we note that employment gains are predominantly in government and healthcare sectors, while employment services (temporary jobs), credit intermediating activities, transportation and warehousing, and information have lost jobs year over year while manufacturing payrolls are flat. The labor differential—the difference between consumers viewing jobs as plentiful and those finding them hard to get— is narrowing, signaling a decline in consumer confidence regarding job availability. Finally, according to the NFIB Small Business Survey, the net share of businesses planning to create new jobs in the next three months fell to just 11 percent, the lowest level since May 2020.

Recent labor data brought a glimmer of hope that inflation would continue to soften, with a dip in average hourly earnings compared to January’s hot pace. The Small Business Survey further indicates that plans to increase compensation have returned to pre-COVID levels. Additionally, Bureau of Labor Statistics data reveals a continued decline in the quits rate, reducing the pressure on businesses to raise wages to attract or retain employees. These developments suggest wage pressures may ease further by year end. Consequently, while we have lowered our recession risk assessment, it is still higher than the market consensus. And despite some speculation against any Fed rate cuts materializing in 2024, we continue to anticipate cuts later this year.

As for the beginning of the easing cycle—following the stronger-than-expected March Consumer Price Index inflation—there is a high probability that it starts in the second half of the year since the Fed will likely need more time to gather confirming data. In the latest Summary of Economic Projections, the Federal Open Market Committee (FOMC) significantly increased the median forecast for 2024 U.S. GDP, slightly increased it for core personal consumption expenditures (PCE) year over year, and said it continues to expect no material increase in the unemployment rate. These adjustments put the median view at three rate cuts for 2024, which suggests the bar is high for the Fed to keep rates unchanged all year, and even higher for more rate hikes to materialize.

Responding to all the latest data, however, Fed officials continue to advocate for a patient approach. A conventional easing cycle is therefore far from guaranteed. Market expectations have already adjusted significantly from market-implied expectations of six rate cuts in 2024 just two months ago to only two as of the end of the April, aligning more closely with the FOMC’s views. So far, the market has taken this delay in stride, but its patience and assessment of credit risk could be tested.

Strong Performance Amid a Remarkable Surge in Issuance

Leveraged credit has continued to deliver positive performance, reflecting the improvement in the economic outlook, strength in credit fundamentals, and the benefit of high yields in a more stable rate environment. High yield bonds returned 1.5 percent in the first quarter of 2024 while bank loans delivered a stronger performance of 2.5 percent. High yield spreads tightened further to 334 basis points by quarter end from 363 basis points at the start of the year, while the Credit Suisse Leveraged Loan three-year discount margin tightened from 528 basis points to 509 basis points. The lowest rated CCC segments of each market delivered the best performance compared to higher ratings, with returns of 3.2 percent in CCCrated high yield corporates and 4.8 percent in CCC-rated bank loans.

Capital markets have become much more active as companies take advantage of tighter spreads, though the increase in activity is largely driven by refinancing rather than new capital supply. High yield bond issuance has surged by 75 percent compared to the first quarter of 2023, with 80 percent of this year’s volume driven by opportunistic refinancing. Similarly, the volume of new institutional bank loans has risen by 172 percent year over year, with refinancing accounting for 62 percent of the activity. Including refinancing, total quarterly volume reached $230 billion, the highest since the third quarter of 2021. This trend suggests a healthy level of capital availability, mitigating the risk of liquidity crises for companies at a scheduled debt maturity.

Repricing activity in the institutional loan market soared from below $5 billion in the first quarter of 2023 to over $100 billion in the first quarter of 2024, reflecting a dramatic shift in risk sentiment between these periods. Repricing activity differs from refinancing in that the terms of an existing loan are modified without a new loan being originated. Over the past six months, those term modifications

High yield bond issuance has surged by 75 percent compared to the first quarter of 2023, with 80 percent of this year’s volume driven by opportunistic refinancing. Similarly, the volume of new institutional bank loans has risen by 172 percent year over year, with refinancing accounting for 62 percent of the activity.

Capital Market Activity Rebounds, But Remains Mostly Refinancing Institutional Loan and High Yield Bond Issuance

have included an average tightening in the contractual loan spread over the secured overnight financing rate (SOFR) of about 50 basis points. Therefore, should the Fed follow through on rate cuts later this year, some borrowers stand to see a meaningful reduction in their borrowing costs between 2023 and 2024.

In general, credit conditions have improved and some borrowers have been able to reduce interest costs through repricing activity. But there remains a subset of issuers that have been sidelined and may be relying on the Fed to deliver some form of easing. Despite the improved economic outlook, the persistence of defaults at a significant rate suggests continued risks. In the next two sections we delve into recent default patterns and provide insights into anticipated recovery rate trends.

Explaining the Paradox of Spreads Tightening While Defaults Continue

Improvements in credit availability often coincide with a favorable default environment and better rating migration, as rating agency concerns over the potential for an issuer to run into future liquidity stress evaporate. Rating migration improved in both sectors, turning positive on a six-month trailing basis for high yield bonds, and less negative for leveraged loans. We also see the impact of better credit availability borne out in the outperformance of lower quality CCCrated bonds and loans compared to higher ratings, as they benefit when defaults aren’t severe enough to erode yields through credit losses.

That said, J.P. Morgan research indicates that defaults in the first quarter reached $9.5 billion across bonds and loans, with the volume in February marking the highest since March 2023. These defaults include out-of-court restructurings,

Source: Guggenheim Investments, Pitchbook LCD. Data as of 3.27.2024. Does not include repricing activity.

The current cycle default stress is driven by inflation and interest rates, which exert some amount of pressure across all sectors even if the severity of the impact can vary depending on how rate changes influence a company’s revenue stream or customer base.

distressed exchanges, and subpar buybacks, which underscore an important market dynamic: Even with narrow credit spreads and accessible capital, certain borrowers remain sidelined and still have to address high debt burdens. Costs for some highly leveraged borrowers remain prohibitively high, and anticipated rate cuts may be insufficient to address all credit issues. Consequently, despite available financing, restructuring emerges as the only feasible option for some companies.

Although there have been some large defaults in healthcare, the current default cycle remains somewhat of a garden variety style, lacking a central industry under stress. Between 2011 and 2021, default cycles were largely centered around commodities—particularly in oil and gas. But the current cycle stress is driven by inflation and interest rates, which exert some amount of pressure across all sectors even if the severity of the impact can vary depending on how rate changes influence a company’s revenue stream or customer base. But within the leveraged credit market, all borrowers exhibit some degree of input cost and interest rate sensitivity due to their leverage profiles.

“Garden

Variety” Style Default Cycle Continues Default Volume by Industry

Source: Guggenheim Investments, J.P. Morgan Research. Data as of 3.31.2024.

Although default activity has continued to some extent, it hasn’t led to wider risk premiums for other companies. A possible explanation is that defaults are more anticipated in this cycle than in the past. Since 1981, a company on the path to default wouldn’t reach a CCC+ rating until three months before defaulting. Recently, the median rating for defaulters cut to CCC+ is a full 11 months in advance. There is a significant jump in 18-month default probability from B- (10 percent probability) to CCC+ (27 percent probability), and the probability continues to jump by more than 10 percentage points at every notch between CCC+ and CC.

Although default activity has continued to some extent, it hasn’t led to wider risk premiums for other companies. A possible explanation is that defaults are more anticipated in this cycle than in the past. Since 1981, a company on the path to default wouldn’t reach a CCC+ rating until three months before defaulting. Recently, the median rating for defaulters cut to CCC+ is a full 11 months in advance.

Recent Default Situations are More Anticipated than in the Past Median Ratings of Recent Defaults

Median S&P Rating Path of Corporate Defaulters, 1981 - 2022

Median S&P Rating of Recent Defaults

There is a significant jump in 18-month default probability from B- (10 percent probability) to CCC+ (27 percent probability), and the probability continues to jump by more than 10 percentage points at every notch between CCC+ and CC.

We believe two factors have contributed to the rating agencies’ improved ability to anticipate defaults. First, the Fed’s forward guidance on interest rates has enabled both the market and rating agencies to foresee the tightening of credit channels compared to past cycles where an exogenous shock was the driver. When coupled with companies grappling with rising input costs, higher labor expenses, and labor shortages, it has become easier to distinguish between companies that can manage cost pressures and those that cannot. Second, the increase in re-defaulters

Default Probability Rises Significantly from B- to CCC

Source: Guggenheim Investments, S&P Global Ratings, Bloomberg. Data as of 3.27.2024. Recent defaulters is based on

As rating agencies have been quicker to identify high default risk, markets have been able to adjust to these risks more proactively through pricing. This has limited the frequency of surprise defaults, containing the risk of spillover to other bonds, which therefore allows spreads of bonds that are not at risk of default to approach historical tights while defaults continue.

over recent years has alerted lenders and market participants to the heightened risk of vulnerability in the current economic climate. Often, these re-defaults lead to bankruptcy, which typically doesn’t come as a shock to either lenders or the rating agencies.

The Market Prices in Default Situations Well in Advance Average and Median Price of Recently Defaulted Instruments

Source: Guggenheim Investments, Bloomberg. Data as of 3.27.2024. Based on a sample of recently defaulted loan and bonds where monthly prices could be pulled from Bloomberg.

As rating agencies have been quicker to identify high default risk, markets have been able to adjust to these risks more proactively through pricing. The prices of defaulted bonds or loans decreased to 70 cents on the dollar a year prior to the default event. Within three months of default, the value of these securities is well within distressed territory and approaches the anticipated recovery value. This has limited the frequency of surprise defaults, containing the risk of spillover to other bonds, which therefore allows spreads of bonds that are not at risk of default to approach historical tights while defaults continue.

The Story Behind Low Recovery Rates

Senior secured loan recovery rates have fallen below historical averages, according to rating agency data and our own experience looking at market pricing. According to Moody’s, the average dollar-weighted recovery for first lien loans was 54 percent in 2023, versus a historical average of 62 percent since 1983. Senior unsecured bonds recoveries were a little closer to average but below that of loans, at just 31 percent compared to a historical average of 33 percent. Years of internal studies and corroborating research from rating agencies have led us to conclude there are generally three primary drivers of recovery rates. The first is broader credit conditions, the second is the structural protection of the individual instrument,

A decline in recovery rates is often observed during periods of adverse market conditions that don’t necessarily have to be full blown recessions, including tighter credit lending, higher default rates, a challenging corporate earnings cycle, and falling asset values. During these periods, recovery rates drop by an average 10 percentage points below the norm, but they eventually recover in the upswing.

and the third is the type of default—typically bankruptcy, distressed exchange, or payment default. Financial metrics like debt/assets have also had some correlation with recovery rates, though with less consistency than the primary three. Credit metrics more commonly influence the probability of default.

Credit Conditions: A decline in recovery rates is often observed during periods of adverse market conditions that don’t necessarily have to be full blown recessions, including tighter credit lending, higher default rates, a challenging corporate earnings cycle, and falling asset values. While the United States didn’t officially enter a recession in 2023, market conditions displayed several of those features. During these periods, recovery rates drop by an average 10 percentage points below the norm, but they eventually recover in the upswing. Although conditions are improving in 2024, it remains to be seen if the positive implications to recovery rates can be extended in this cycle because we believe the credit-specific structural drivers will outweigh macro factors.

Recovery Rates Suffer in Periods of Adverse Conditions

1. Asian Financial Crisis, Tech Bubble Bursts, 9/11 Terrorist Attack, U.S. Recession

2. Global Financial Crisis / Great Recession

3. European Debt Crisis, U.S. Rating Downgrade by S&P

4. Oil Bear Market and Strong Dollar-Driven U.S. Earnings Recession

5. Global COVID-19 Pand

6. Severe Inflation and Fed Hiking Cycle

Source: Guggenheim Investments, Moody’s, Bloomberg. Data as of 2.29.2024. Gray areas represent recession.

Structural protections: Structural protections that influence recovery rates include covenants, security status (secured versus unsecured), and available debt subordination. In the loan market, where the deterioration in recovery rates is most worrisome, a significant factor is the shift away from maintenance covenants. About 90 percent of the market consists of covenant-lite (cov-lite) loans today, which lack stringent financial requirements, including leverage limits. This shift allows companies to exhaust financial levers that might otherwise have been

Senior Unsecured Bonds Historical Average Recovery Rate

From 1987 to 2022, defaulted loans that had more than 75 percent debt cushions had an average recovery rate of 91 percent, while loans with less than 25 percent subordination had an average recovery rate of only 51 percent. In 2023, the average debt cushion for first lien loans was less than 10 percent.

used for debtholders to recover value. A report by S&P Global Ratings, analyzing data from 2014 to 2020, found that cov-lite loans had an average recovery rate 11 percentage points lower than that of loans with traditional covenants. In recent years, the lack of covenants also gave borrowers enough leeway to move valuable assets out of reach by certain debtholders affected by a default or bankruptcy. So they will likely suffer more in the post-COVID period.

In addition to fewer covenants, the shrinking debt subordination that cushions first lien loans is weighing on their recovery rates. The capital structures of many leveraged buyouts (LBOs) that were financed in the leveraged loan market have comprised smaller amounts of loss absorbing capital that is junior to the senior secured loans. Pitchbook/LCD reviewed recoveries for leveraged loans based on the amount of subordinated debt cushion from 1987 to 2022 and found that defaulted loans that had more than 75 percent debt cushions had an average recovery rate of 91 percent, while loans with less than 25 percent subordination had an average recovery rate of only 51 percent. In 2023, the average debt cushion for first lien loans was less than 10 percent.

While there seem to be higher equity contributions in LBO transactions relative to history, which is often pointed to as a positive development, this may be influencing the increased use of distressed exchanges since sponsors have more skin in the game.

While Equity Contributions Increase, Debt Cushions Typically Fall in LBO Activity

Source: Guggenheim Investments, Pitchbook/LCD. Data as of 12.31.2023.

Type of default: A third driver of recovery rates is the form of default (usually distressed exchanges, bankruptcies, or payment default). Given the recent prevalence of bankruptcies and distressed exchange in default trends, we narrow in on typical recovery experiences across these two types.

Debt Cushion Below First Lien

Equity Contribution as a Share of Transaction Value

Since 1990, the average recovery rate for a term loan that ends in bankruptcy is 56 percent versus 62 percent in distressed exchange. For unsecured bonds, it is 44 percent in bankruptcy versus 53 percent in distressed exchange.

Bankruptcies are conducted in various formats, but the two most prevalent are Chapter 7, which is liquidation, or Chapter 11, which is a reorganization. A distressed exchange is an agreement between lenders and the borrower to restructure some portion or all debt outstanding outside of a legal court to alleviate the borrower’s obligations. It is often carried out as some amount of principal forgiveness, delayed payment, or reduction in interest expense in exchange for equity or better debt seniority. Rating agencies usually label an action as a distressed exchange by downgrading a credit to “limited default” or “selective default.” In recent years, distressed exchanges have become a more prevalent form of default, reaching almost 50 percent of default activity in 2023.

Because of the extreme nature of bankruptcies, which generally make them a last resort for a business, S&P Ratings show that on average they carry lower recovery rates compared to distressed exchanges. Since 1990, the average recovery rate for a term loan that ends in bankruptcy is 56 percent versus 62 percent in distressed exchange. For unsecured bonds, it is 44 percent in bankruptcy versus 53 percent in distressed exchange.

Recovery Rates Are Historically Lower for Defaults Due to Bankruptcy

Source: Guggenheim Investments, S&P CreditPro. Data as of 3.31.2024.

We caveat that issuers in recent distressed exchanges may be in their second or third round of such restructuring. As a result, we believe there is much more dispersion in recovery rates. We view recent distressed exchanges as being highly contentious, with asymmetric information across sponsors, different lender groups, and other capital providers that are trying to recover value. This leads to different outcomes for lenders that should be considered equal in claim priority against a particular asset or cash flow. Furthermore, the decline in structural protection in the market that we highlighted in the previous section will also affect the ultimate recoveries of any form of default. Maximizing recovery value involves a high level of engagement, so passive credit investors should not rely on historical average metrics to guide their return assumptions.

According to Moody’s historical data since the 1980s, ultimate recoveries are usually 9 percentage points higher than price-based estimates for bank loans and 14 percentage points higher for senior unsecured bonds.

Gap Between Actual Recoveries and Price-Based Estimates: One final point to consider in recovery trends is that ultimate recoveries are often higher than pricebased estimates, and history may one day show that the gap between ultimate recoveries and price-based estimates widened in the current cycle. Ultimate recoveries for defaulted credits are typically not known for months, or even years, later. During this time, equity holders, lenders, and lawyers go through an arduous evaluation and negotiation process. This entails an assessment of collateral if the debt is secured, a valuation of company assets, a review of legal documentation, and an operational analysis of the company, among other things. Since recent recovery statistics are based on the average price of the bond or loan 30 days after default, they do not capture other negotiations that often happen behind closed doors. According to Moody’s historical data since the 1980s, ultimate recoveries are usually 9 percentage points higher than price-based estimates for bank loans and 14 percentage points higher for senior unsecured bonds.

Ultimate Recoveries are Typically Higher than Price-Based Estimates

There is a possibility that the gap between price-based recoveries and ultimate recoveries has widened in the current environment because the tendency for investors to quickly sell off deteriorating credits at the first hint of trouble may have increased, driven by an assessment of opportunity cost. The motivation to hold onto a failing credit diminishes significantly when, by comparison, a BBrated bond yields 6.5 percent versus just 3.2 percent in 2021, and a single B-rated bond yields 7.5 percent versus 4.5 percent in 2021. This recalibration of risk and reward given the current yield environment might inadvertently affect the perceived risk of distressed assets, suggesting that average recovery values could be underestimated more than usual. Of course, capturing the value of an ultimate recovery requires significant patience, experience, and resources, which is not possible in passive investment vehicles.

Source: Guggenheim Investments, Moody’s Investors Service. Data as of 12.31.2023. TTM = Trailing twelve months. Bank loan trading price recoveries are based on 1st lien bank loans only, while ultimate recoveries are based on all term loans including 1st lien, 2nd lien and unsecured.

Trailing 12 Months through February 2024, Recoveries Based on Trading Prices

2023 Recoveries Based on Trading Price

Bank Loans

Senior Unsecured Bonds

1987-2023 Average Recoveries Based on Trading Price

Average Ultimate Recovery, 1987-2023

Investment Implications

At this moment in the credit and economic cycle, navigating the high yield and bank loan markets requires a sophisticated approach that balances the optimism around economic recovery and rate cuts with the practical considerations of default rates and recovery scenarios. Investors should remain vigilant, recognizing the potential for adjustments in market conditions that could impact recovery rates and, consequently, the overall risk assessment of leveraged credit. It remains an opportune time to de-risk to deliver alpha rather than re-risk to chase beta, given tight risk premiums. That does not mean neglecting the space for opportunities to diversify, since the risk-reward balance in an environment of high yield bonds before the Fed starts easing continues to look favorable to us and other investors.

Recovery rates emerge as an important variable. Recoveries typically rebound to their historical averages or higher during economic expansions, characterized by high company valuations, ample capital availability, and narrow spreads. Given that the current environment aligns with these conditions, we anticipate some improvement in recovery rates by the end of 2024. But as we explained, the prospect for this is better in the high yield corporate bond market than in bank loans, given long-term structural trends. The profile of the high yield bond market is providing more opportunities for investors to access the market without sacrificing recovery rate expectations, but for loans which have less debt subordination and few covenants, recoveries might persist below the historical average. This distinction is essential for understanding the risk-return profile of two markets that are in some ways converging in their characteristics.

Our calculations, based on a 30 percent recovery rate assumption for bonds and a 55 percent recovery rate for loans, suggest a market-implied default rate expectation of 1.1 percent for bonds and 6.2 percent for loans. Even adjusting for bonds’ secured profile to a 50 percent recovery rate, the implied default rate shifts modestly to 1.5 percent, reflecting spreads that are only 75 basis points above the historical low. This analysis suggests that there may be better opportunities in loans than in bonds, but also that market pricing might not account for the potential that current growth expectations disappoint, indicating a market priced too close to perfection. Despite an overall positive economic trajectory, the persistence of defaults in 2024 underscores the importance of strategically navigating the current environment via active management and credit selection.

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 ICE BofA U.S. High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $250 million. In addition, qualifying securities must have risk exposure to countries that are members of the FX-G10, Western Europe or territories of the US and Western Europe. The FX-G10 includes all Euro members, the US, Japan, the UK, Canada, Australia, New Zealand, Switzerland, Norway and Sweden.

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 percent.

AAA is the highest possible rating for a bond. Bonds rated BBB or higher are considered investment grade. BB, B, and CCC-rated bonds are considered below investment grade and carry a higher risk of default, but offer higher return potential. A split bond rating occurs when rating agencies differ in their assessment of a bond.

The three-year discount margin to maturity (DMM), also referred to as discount margin, is the yield-to-refunding of a loan facility less the current three-month Libor rate, assuming a three year average life for the loan.

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

Investing involves risk, including the possible loss of principal. In general, the value of a fixed-income security falls when interest rates rise and rises when interest rates fall. Longer term bonds are more sensitive to interest rate changes and subject to greater volatility than those with shorter maturities. During periods of declining rates, the interest rates on floating rate securities generally reset downward and their value is unlikely to rise to the same extent as comparable fixed rate securities. 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.

This article is distributed 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 article 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 article 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.

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