High-Yield and Bank Loan Outlook: Leveraged Credit is Still in a Bull Market

April 2014

High-Yield and Bank Loan Outlook Leveraged Credit is Still in a Bull Market Investment Professionals

High-yield bonds and bank loans posted positive returns of 3.1 and 1.2 percent in the first

B. Scott Minerd

quarter of 2014, respectively, as extreme U.S. weather, emerging market concerns,

Global Chief Investment Officer

and tensions in Ukraine failed to dampen strong demand. Leveraged credit continues to enjoy strong demand and low defaults, and we believe the improving macroeconomic

Michael P. Damaso

environment should continue to drive positive returns and tighter spreads until defaults rise.

Chairman, Corporate Credit

History shows that defaults do not rise until one to two years after the Federal Reserve begins

Investment Committee

tightening interest rates – something not expected to start until mid-2015 at the earliest.

Jeffrey B. Abrams Senior Managing Director, Portfolio Manager

As we have highlighted in previous reports, we believe it is becoming increasingly important to monitor risks that will influence our strategy shift once it is time to position portfolios defensively. However, the consequences of these risks would more likely be felt when the current bull market in credit ends.

Kevin H. Gundersen, CFA Senior Managing Director,

Report Highlights

Portfolio Manager

§ High-yield bonds are entering a realm of relative overvaluation. High-yield bond spreads

Thomas J. Hauser Managing Director, Portfolio Manager Maria M. Giraldo Senior Associate, Investment Research

and bank loan discount margins continued to tighten in recent months, ending the quarter at 409 bps and 457 bps, respectively. High-yield bond spreads are below the historical ex-recession average and yields in both sectors are near their all-time lows. § Spread compression can nevertheless continue. Continued demand from both individual and institutional investors should drive high-yield spreads tighter until default rates rise. § Default rates should not start rising until 2016 or beyond. § We continue to monitor weaknesses in leveraged credit that would influence how we position our portfolios defensively. § Risks to the outlook include the growing influence of high-yield ETFs amid declining dealer inventories, and the implications that a slowdown in the CLO market as a result of regulatory changes might have on bank loans in the future.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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Leveraged Credit Scorecard As of Month End

High-Yield Bonds Dec-13 Spread Yield

Jan-14 Spread Yield

Feb-14 Spread Yield

Mar-14 Spread Yield

Credit Suisse High-Yield Index

436

5.77%

457

5.79%

418

5.32%

409

5.35%

Split BBB

245

4.65%

247

4.06%

226

3.79%

215

3.82%

BB

298

4.96%

323

4.77%

289

4.35%

280

4.44%

Split BB

349

5.17%

377

5.08%

346

4.75%

342

4.84%

B

445

5.75%

460

5.57%

424

5.11%

413

5.12%

CCC / Split CCC

745

7.00%

760

8.57%

697

7.85%

698

7.99%

Bank Loans Dec-13 DMM* Price

Jan-14 DMM*

Price

Feb-14 DMM* Price

Mar-14 DMM* Price

Credit Suisse Institutional Leveraged Loan Index

465

100.05

454

100.25

456

100.09

457

99.99

Split BBB

295

100.11

290

100.28

299

99.99

303

99.80

BB

356

100.26

347

100.42

351

100.17

353

100.01

Split BB

420

100.28

416

100.44

425

100.13

422

100.11

B

501

99.97

490

100.18

492

100.08

491

99.95

CCC / Split CCC

821

98.99

792

99.67

792

99.71

793

99.78

Source: Credit Suisse. Excludes split B high-yield bonds and bank loans. *Discount Margin to Maturity assumes three-year average life.

Credit Suisse High-Yield Index Returns

Credit Suisse Institutional Leveraged Loan Index Returns Q4 2013

3.5% 3.0%

Q4 2013

Q1 2014

Q1 2014

4.0%

4.0% 3.5%

3.4% 3.1%

3.1%

2.9%

2.8%

2.5%

3.5%

3.5%

3.6% 3.3%

3.0%

3.5%

2.2%

2.0%

1.5%

1.5%

1.0%

1.0%

0.5%

0.5%

0.0%

0.0% Split BBB

2.7%

2.5%

2.0%

Index

3.2%

3.0%

BB

Split BB

B

CCC/Split CCC

2.1% 1.8%

1.7% 1.2%

1.3%

1.3%

1.1%

0.8%

0.9%

0.5%

Index

Split BBB

BB

Split BB

B

CCC/Split CCC

Source: Credit Suisse. Data as of March 31, 2014.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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“Floating-rate assets, particularly bank loans and collateralized loan obligations, will likely continue to outperform.

Flows into bank loans should continue as interest rates rise and there is likely some spread tightening left in the sector.

Credit spreads should not start to widen until we see an increase in defaults, which start to tick up usually about one to

Macroeconomic Overview The Forward Path for Credit Spreads Inclement U.S. weather caused weaker-than-expected economic data. The harsh, cold winter resulted in a raft of disappointing reports from U.S. industrial production to mortgage applications and home sales. At the same time, emerging market volatility driven by reactions to the Fed’s tapering drove investors back to U.S. Treasuries, causing the 10-year U.S. Treasury yield to decline 46 basis points to 2.57 percent between December and midFebruary. The S&P 500 tumbled 3.6 percent in January, as investors debated if the weather or the pace of tapering was causing the U.S. economy to slow.

two years after the Fed begins to tighten.

The events that have characterized the start of 2014 appear unlikely to interrupt the U.S.

So, even if you believe Dr. Janet Yellen

expansion, and we expect that spring will bring much of the pent-up demand that is waiting

will begin raising interest rates in 2015,

for the thaw. Recognizing that recent first quarter weakness in economic data is likely to

credit spreads are unlikely to eaningfully

prove temporary, Federal Reserve Chairwoman Janet Yellen has also made it clear that

widen until late in 2016 or 2017.”

tapering is on a pre-set roadmap and that interest rates will begin to rise no sooner than six

– Scott Minerd, Global CIO

months after the Fed’s asset purchases end. The Federal Reserve’s desire to be predictable should lead to an incremental path for the coming tightening cycle, and that suggests increasing exposure to floating-rate instruments, such as bank loans.

Their guidance allows us to predict that credit spreads will not turn around soon. The chart below shows that periods of monetary accommodation are typically followed by one to two more years of low default rates. Therefore, historical precedence suggests that the current low default-rate environment should extend at least into 2016. All around, the data increasingly argues that we should not expect to see credit spreads widen over the next two years.

Helped by near-zero interest rates, high-yield default rates have now declined to 0.9 percent- well below

Federal Funds Target Rate vs. 2-Year Forward High-Yield Default Rate 16%

the historical average of 4 percent.

14%

Historically, periods of monetary

12%

accommodation have led to low defaults rates for approximately one to two

10%

years. The Fed’s indication that short-

8%

term rates should continue until the

6%

middle of 2015 extends the current lowdefault rate environment until 2016.

2-Year Forward Default Rate

Federal Funds Target Rate

4% 2% 0% 1986

1988

1990

1992

1994

1996

1998 2000 2002 2004 2006 2008 2010

2012

2014

2016

Source: Credit Suisse, Bloomberg, Guggenheim. Data as of March 31, 2014.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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Markets that Stay Overvalued Are Called Bull Markets Entering the Final Two-Year Stretch of the Rally At the start of the year, we said the benign credit environment and the supportive technical backdrop were reasons to remain constructive on leveraged credit. Amid increased volatility in Treasury rates and U.S. equities in the first quarter, high-yield bonds and bank loans posted positive quarterly returns of 3.1 and 1.2 percent, respectively. Our conviction remains unchanged, as the factors that have supported spread compression over the past few years remain in place.

Demand has not subsided as assets continue to flow into leveraged credit. Bank loans have had over 90 consecutive weeks of inflows from mutual funds. CLO activity, which many believed would be hurt by the current interpretation of the recently finalized Volcker Rule, picked up in February and March following a weak January, totaling $22 billion in the first quarter. Together, CLO volume and sustained bank loan mutual fund flows are indicative of the strength of demand for floating-rate assets as the market continues to face the prospect of rising rates.

During bullish credit markets, mutual

High-Yield Mutual Fund Sentiment Remains Bullish

fund managers reduce holdings of liquid assets. Since mid-2013, liquid assets held within high-yield mutual funds have been below the historical average, reflecting bullish sentiment from managers.

Mutual Fund Liquid Assets

High-Yield Spreads

Cautious Area

12%

1,900

11%

1,700

10%

1,500

9%

1,300

8%

1,100

7%

900

6%

700

5%

500

4%

300

3% 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

100

Source: JP Morgan, Credit Suisse, Guggenheim. Data as of December 31, 2013.

High-yield bond demand remains strong, although flows have been less steady on the back of the unexpected Treasury volatility that kicked off the year. However, mutual fund managers continue to expect that flows will not experience a significant reversal. We gauge this based on the amount of liquid assets held in high-yield mutual funds. Mutual funds must manage for daily redemptions, but maintaining liquidity causes a “cash drag” – an anchor on performance caused by holding liquid assets with low expected returns.

When managers expect steady flows, they are less inclined to hold a high portion of their portfolio in liquid assets. High-yield bond funds have traditionally held about 6.5 percent of their portfolios in liquid assets. As of the end of the first quarter, fund managers held only 5.1 percent of high-yield mutual funds in liquid assets. So far in 2014, the expectation that inflows will outpace outflows has proven correct, with net inflows totaling $3.4 billion year-to-date.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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Five years of strong demand has brought high-yield bonds to a realm of relative overvaluation, with bank loans not far behind. The Credit Suisse High Yield Index spread is currently at 418 basis points, below the historical ex-recession average of 537 basis points and ex-recession median of 498 basis points. The yield-to-worst has also declined to 5.3 percent, and is close to revisiting the all-time low of 5.1 percent set last year.

As U.S. Treasury yields decline while

High-Yield Bond Yields Approach the May 2013 Low

spreads tighten, high-yield bond and bank loan yields are close to revisiting the all-time low set in May 2013.

Declining yields should make price return a larger driver of total returns.

High-Yield Bonds (LHS)

High-Yield Bonds Low (LHS)

Bank Loans (RHS)

Bank Loans Low (RHS)

22%

11%

19%

10%

17%

9%

14%

8%

12%

7%

9%

6%

7%

5%

Bank Loans Low: 4.8% High-Yield Bonds Low: 5.1%

4% Jan-08 Jul-08 Jan-09 Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Jan-13

Jul-13

Jan-14

4%

Source: Credit Suisse. Data as of March 31, 2014.

The three-year discount margin on the Credit Suisse Institutional Leveraged Loan Index is at 457 basis points, wider than the historical ex-recession average of 356 basis points, but it is important to highlight a disparity between secondary and primary loan margins.

Bank loans carry less call protection than high-yield bonds, therefore, when prices rise above $100, borrowers may be prompted to refinance the loan for a lower yield.

This dynamic keeps secondary loan prices constrained by their call price.

The primary market may better represent bank loans at current levels. All-in spreads for primary BB-rated loans and primary B-rated loans are at 327 basis points and 465 basis points, respectively, 22 and 23 basis points tighter than indicated by the index. These levels continue to look compelling when compared to spreads of BB-rated and B-rated bonds, which are currently at 280 basis points and 413 basis points, respectively.

Given our expectation that default rates will remain low, we believe that short-term sell-offs should be viewed as attractive entry points, similar to last year’s experience. Although we witnessed a mass exodus of cash from fixed-income in June of last year, individual and institutional assets in leveraged credit grew 14 percent on a year-over-year basis, in line with the four-year compounded annual growth. This resulted in credit spreads tightening by 105 basis points from the sell-off to year-end.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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Looking at high-yield bond and bank

Leveraged Credit Assets Held in Institutional Accounts, Mutual Funds and ETFs

loan assets held in institutional accounts and mutual funds, it is clear that the broad fixed-income sell-off last year marked only a temporary turn in demand.

Institutional and mutual funds assets in leveraged credit grew by 14 percent in 2013, with bank loan mutual funds making up 61 percent of total growth.

Bank Loan Institutional Accounts

High-Yield Bond Institutional Accounts

Bank Loan Mutual Funds & ETFs

High-Yield Mutual Funds & ETFs

$1,200 Bn $1,000 Bn $180 $173

$800 Bn $600 Bn $400 Bn

$151 $26

$146

$74

$166 $57

$419

$449

$331 $299

$200 Bn $0 Bn

$165

Dec 2010

$223

Dec 2011

$288

$308

Dec 2012

Dec 2013

Source: eVestment Alliance, Morningstar Direct. Data as of December 31, 2013.

What Lies Beyond the Finish Line How Regulatory Changes May Impact Leveraged Credit Perhaps it is no coincidence that just as improving macroeconomic factors are prompting the Federal Reserve to taper its Quantitative Easing (QE) program, a slew of anticipated regulatory changes are coming into effect or are being finalized over the course of this year that may impact leveraged credit markets. The table below briefly summarizes some of the forthcoming regulatory changes which we believe may have the most impact on leveraged credit. These developments will play a role in our strategy shift once it is time to position portfolios more defensively.

Until April, the most debated issue in leveraged credit was the expected impact from the recently finalized Volcker Rule regulations of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Since the financial crisis, parameters detailing a CLO’s allowable investments have included a high-yield bond bucket which managers tap to boost returns.

Under the regulatory guidance to implement the Volcker Rule’s ban on proprietary trading, banks may no longer own CLOs that contain non-loan investments (such as high-yield bonds). According to Thomson Reuters, only 31 percent of U.S. CLOs would be in compliance (because they have no bond or structured finance holdings). Banks would be prohibited from owning that remaining 69 percent of the CLO market – or nearly $200 billion – under the Volcker Rule.

Leveraged credit investors feared that banks would be forced to sell their existing CLO investments, driving CLO spreads wider and stalling origination. CLOs represent half of the loan market and 57 percent of demand that sustained primary bank loans last year.

Instead, we saw the emergence of new Volcker-compliant structures (referred to as “CLO 3.0”) which contain no bonds during the first quarter. Widespread selling also did not materialize in the secondary CLO market, helped by the lack of urgency as the conformance period was not until July 2015. In April 2014, the Federal Reserve pushed the conformance deadline further to July 2017, making widespread selling less likely to occur at this point.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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We expect that the next CLO-related debate will revolve around risk-retention rules, also part of Dodd-Frank and expected to be finalized this summer with a possible effective date toward the end of 2015. In their current proposed form, risk retention rules would require CLO managers to hold 5 percent of each CLO they issue. We believe this is a big threat to the CLO market, as large CLO managers and frequent issuers may not have the balance sheet capacity to hold the investment. Our research also shows that the schedule of current CLOs exiting their reinvestment period makes continued CLO formation necessary to mitigate bank loan defaults in 2017 and beyond.

Regulation New Basel Regulatory Capital Regime (Basel III)

Summary: Basel III raises capital requirements for banks and outlines new rules on leverage and liquidity requirements. Basel rules are a set of international banking regulations put forth by the Basel Committee on Bank Supervision which set minimum capital requirements of financial institutions, with the goal of minimizing credit risk.

Highlights: The Supplementary Leverage Ratio (SLR) and the Liquidity Coverage Ratio (LCR) will most likely impact credit liquidity and availability. The SLR calculates the ratio of an institution’s tier 1 capital to on-balance-sheet assets and several off-balance-sheet exposures. The SLR may cause banks to simply shrink their balance sheets or shift operations away from low-margin businesses such as repo funding. The LCR requires a banks to own sufficient high-quality liquid assets (HQLAs) to cover 100 percent of its cash outflows over a 30-day stress period. This may limit banks from extending short-term financing.

Expected to Impact: High-yield and bank loan liquidity Credit supply

Dodd-Frank Wall Street Reform and Consumer Protection Act

Summary: Dodd-Frank regulation targets Wall Street reform in response to the financial crisis.

The most well known implication of Dodd-Frank is the banking restriction on proprietary trading, as this portion of the act forced banks to shed several of the operations and cost several jobs in 2011.

Highlights: The Volcker Rule and Risk Retention Rules may have the biggest impact on leveraged lending. Both rules affect the demand component of bank loans by potentially exerting downward pressure on CLO origination. CLOs represent about half of the existing loan market.

Expected to Impact: Loan demand (via CLOs)

Leveraged Lending Guidelines

Summary: Revised guidelines issued by the Federal Reserve Board, the Federal Deposit Insurance Corporation (FDIC), and Office of the Comptroller of the Currency (OCC), targeting banks that engage in leveraged lending.

Highlights: There are currently no specific definitions on risky underwriting activity, but market participants agree that leverage multiples, covenants, and analysis showing a borrowers ability to pay back loans will be used by the regulators to identify a “criticized loan.”

Expected to Impact: Bank loan supply

A dramatic decline in CLO issuance would undoubtedly put upward pressure on loan spreads today, but, we believe the biggest risk lies in 2017, when 69 percent of the current CLO market will have reached the end of their reinvestment period. CLOs have a predetermined period, typically lasting between two and three years, where they are able to reinvest proceeds into additional loans. After the reinvestment period ends, CLOs must use proceeds to pay down debt instead, effectively reducing inflows into the loan market.

The combined effect of a weak CLO primary market and an amortizing secondary CLO market would be a significant decline in loan demand when coincidentally, 15 percent of the loan market matures and may be looking to re-extend debt to avoid principal defaults.

With bank loans heavily relying on the sustained demand from CLOs, we will monitor this trend closely.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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69 percent of CLOs currently

CLO Reinvestment Period End-Year

outstanding would have exited the reinvestment period by the beginning of 2017, raising the question as to what

31%

will happen to maturing loans that

Reinvestment Period Ends January 2017 or After

need to re-extend debt in the midst of a rising-rate environment and a smaller investor market? A robust CLO primary market will be needed to sustain the

69% Reinvestment Period Ends by December 2016*

bank loan market in the future.

Source: Thomson Reuters, Guggenheim. Data as of February 28, 2014. *Includes CLOs that have already exited their reinvestment period as of March 31, 2014.

Basel III and Dodd-Frank Impact on High-Yield Bonds Uncertainty in the Future of Corporate Bond Liquidity Corporate bond selling was facilitated by banks before the financial crisis, but banks have significantly reduced their holdings of corporate bonds because of new regulation which includes higher capital requirements, supplementary leverage ratios, and the ban on proprietary trading. Data from the Federal Reserve suggests that banks have cut corporate bond inventories by at least 75 percent from their level at the peak 2007, to $8 billion. This is significantly smaller than the $32 billion in high-yield assets held in fast-moving ETFs.

As banks have been forced to de-risk due to increased regulation, dealer inventories of high-yield corporate bonds have declined dramatically from their peak in 2007. At the same time, high-yield mutual fund and ETF assets have soared by 163 percent.

High-Yield Bond Dealer Inventories Decline While Mutual Fund / ETF Assets Grow $350

$35 Bn ETF vs. Non-ETF OAS

High-Yield Bond Dealer Inventory (LHS)

$30 Bn

$300

$25 Bn

$250

$20 Bn

$200

$15 Bn

$150

The combined effect may be a liquidity crunch in high-yield bonds, but we will not know until demand reverses.

High-Yield Mutual Fund and ETF Assets (RHS)

$10 Bn

$100 $50

$5 Bn $0 Bn 2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

$0

Source: New York Federal Reserve, Morningstar, Guggenheim. Data as of March 5, 2014. High-yield bond dealer inventory before April 2013 is based on Guggenheim estimates due to limited New York Fed data.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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The impact of limited dealer inventory will be amplified if demand for high-yield bonds were to turn down dramatically, and mutual fund managers were forced to liquidate assets at “fire sale” prices, driving prices down and spreads higher. The worst-case scenario would be a period eerily similar to 2008, when high-yield mutual fund outflows forced managers to move 11 percent of their assets into cash to meet redemptions, causing high-yield bond prices to decline 40 percent.

Last year’s sell-off was not as dramatic, and we do not expect a similar 2008-like period to ensue because high-yield bonds and bank loans continue to meet the investor need of shortening duration and earning higher yield. However, high-yield bond prices can be volatile. They declined 3.3 percent last June alone when investors fled bonds. Bank loans had a similar experience in August 2011, when investors withdrew $7.3 billion from bankloan funds and prices declined by 4.5 percent in that single month.

Investment Implications Strategies to Insulate Portfolios from Emerging Risks As we highlighted in our previous report, emerging risks remain beyond the horizon, but it is becoming increasingly important to monitor them. We have begun considering ways to shift portfolios more defensively when the time comes to face higher interest rates, and we have identified some strategies that can help position portfolios to weather the volatility that might emerge once we cross that line. These include: 1. Investments which are less likely to be caught in large waves of selling. For example, bonds that make up a large percentage of an ETF, or are held across multiple ETFs, may experience severe price declines as the sell-off is compounded by multiple sellers in fast-moving accounts. Of the top 10 holdings within the two largest high-yield bond ETFs (HYG and JNK), six securities overlap.

The significant growth in high-yield

Bonds Held in ETFs Are Trading at Wider Spreads

ETF assets could amplify high-yield

30

bond volatility by compounding selling activity if demand reverses.

20

Several research analysts have shared

to suffer from waves of selling from various vehicles. This focus on “nonETF” bonds appears to be causing spreads for bonds held in ETFs to widen relative to non-ETF bonds.

Spreads (bps)

presence within ETFs, bonds less likely

ETF vs. Non-ETF OAS

10

lists of high-yield bonds with the least

0 -10 -20 -30 -40 Feb-2010

Aug-2010

Feb-2011

Aug-2011

Feb-2012

Aug-2012

Feb-2013

Aug-2013

Source: Bank of America Merrill Lynch. Data as of January 31, 2014.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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2. Smaller high-yield bonds and bank loans which offer a significant yield pickup over larger deals. In select transactions, investors have the ability to drive deal terms, an opportunity generally not available in larger debt offerings. Also, during short-term selling periods, larger, more liquid bonds are typically liquidated first as mutual funds and ETFs try to meet redemptions. In June 2013, high-yield bonds between $100-$200 million in size lost 1.4 percent, while bonds larger than $500 million lost 2.8 percent.

Credit Suisse High-Yield Bond Index Size

Market Weight

Yield to Worst

Spread to Worst

$0 mm to $100 mm

0.11%

7.98%

702 bp

$101 mm to $199 mm

1.68%

7.35%

645 bp

$200 mm to $299 mm

7.89%

6.62%

569 bp

$300 mm to $399 mm

11.49%

5.92%

495 bp

$400 mm to $499 mm

10.54%

5.41%

440 bp

$500 mm and Over

68.22%

5.15%

389 bp

Credit Suisse Institutional Leveraged Loan Index Size

Market Weight

Yield

Spread to Worst

$0 mm to $100 mm

0.78%

8.41%

809 bp

$101 mm to $200 mm

5.29%

6.98%

669 bp

$201 mm to $300 mm

8.40%

5.85%

558 bp

$301 mm to $500 mm

15.92%

4.58%

427 bp

$501 mm to $1000 mm

25.51%

4.46%

414 bp

$1001 mm and Over

44.11%

4.36%

403 bp

Source: Credit Suisse. Data as of March 31, 2014.

3. Spread the maturity profile of credit portfolios. We believe that a barbell strategy continues to represent a good strategy, as it allows investors to structure a portfolio with both short- and longer-duration securities. A barbell strategy is typically used to achieve a desired duration target for investors that have a fixed liability in the future, but it can also inherently avoid concentrating the maturities of credit investments in one year, thereby mitigating principal default risk.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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Important Notices and Disclosures 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.

Guggenheim Partners

This article may be provided to certain investors by FINRA licensed broker-dealers affiliated with Guggenheim Partners. 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 Partners’ assets under management figure is updated as of 12.31.2013 and includes consulting services for clients whose assets are valued at approximately $36 billion.

1

Guggenheim Investments’ total asset figure is as of 12.31.2013 and includes $12.5 billion of leverage for assets under management and $0.4 billion of leverage for serviced assets. Total assets include assets from Security Investors, LLC, Guggenheim Partners Investment Management, LLC, Guggenheim Funds and its affiliated entities, and some business units including Guggenheim Real Estate, LLC, Guggenheim Aviation, GS GAMMA 2

Advisors, LLC, Guggenheim Partners Europe Limited, Transparent Value Advisors, LLC, and Guggenheim Partners India Management. Values from some funds are based upon prior periods.

Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: GS GAMMA Advisors, LLC, Guggenheim Aviation, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Partners Investment Management, LLC, Guggenheim Partners Europe Limited, Guggenheim Partners India Management, Guggenheim Real Estate, LLC, Security Investors, LLC and Transparent Value Advisors, LLC. Guggenheim Partners Investment Management, LLC (GPIM) is a registered investment adviser and serves as the adviser to the strategy presented herein. This material is intended to inform you of services available through Guggenheim Investments’ affiliate businesses.

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. ©2014, Guggenheim Partners, LLC.

High Yield and Bank Loan Outlook | Q2 2014

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deliver long-term results with excellence and integrity. We invite you to learn more

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about our expertise and values by visiting guggenheimpartners.com/investments.

GPIM12657 Guggenheim Partners

High Yield and Bank Loan Outlook | Q2 2014

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