High-Yield and Bank Loan Outlook - April 2015

April 2015

High-Yield and Bank Loan Outlook Positioning for the Upcoming Fed Tightening Cycle Investment Professionals B. Scott Minerd Chairman of Investments and Global Chief Investment Officer Jeffrey B. Abrams Senior Managing Director, Portfolio Manager Kevin H. Gundersen, CFA Senior Managing Director, Portfolio Manager Thomas J. Hauser Managing Director, Portfolio Manager Maria M. Giraldo Vice President, Investment Research

If, as the old Wall Street adage goes, bull markets climb a “wall of worry,” credit markets have been struggling to climb that wall since July 2014. Disappointing U.S. economic data in the first quarter of 2015 have resulted in mixed returns in high-yield corporate bonds as investors question the underlying strength in the U.S. economy.

We believe this year’s winter soft-patch may have a greater impact than most expect based on our estimate of first-quarter gross domestic product (GDP) growth, which we believe is weaker than consensus estimates.

Once the impact of the harsh winter subsides, a rebound in U.S. growth would allow the Fed to proceed with raising interest rates, as intended. Increasingly, investors are questioning how fixed-income markets will perform as the Fed lifts interest rates from a historically low level. In this report, we compare the performance of high-yield corporate bonds and bank loans to investment-grade bonds, intermediate Treasuries and agency bonds during the last Fed tightening cycle. Our analysis confirms our expectation that high-yield bonds and bank loans should outperform longer duration, lower yielding fixed-income asset classes as the Fed tightens monetary policy.

Report Highlights § The Credit Suisse High Yield and Leveraged Loan Indices posted positive quarterly returns of 2.6 percent and 2.1 percent in the first quarter 2015, a rebound from two consecutive quarters of negative returns in both sectors. § A bullish undertone exists in bank loans, but sentiment in the high-yield corporate bond market remains uneasy heading into the second quarter based on a monthly loss for the high-yield index in March 2015. § Investors should expect some volatility ahead as the market appears to be underestimating the full impact of the severe winter on U.S. economic data and Q1 2015 GDP growth. § Given lower durations and attractive yields relative to investment-grade corporate bonds and Treasuries, we believe leveraged credit is positioned to outperform in the next Fed tightening cycle.

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Leveraged Credit Scorecard As of Month End High-Yield Bonds December 2014 Spread Yield

January 2015 Spread Yield

February 2015 Spread Yield

March 2015 Spread Yield

Credit Suisse High-Yield Index

564

7.10%

593

6.97%

512

6.38%

540

6.60%

Split BBB

250

4.16%

262

3.83%

227

3.81%

239

3.86%

BB

364

5.22%

396

5.08%

330

4.66%

359

4.90%

Split BB

462

6.16%

490

5.99%

413

5.42%

438

5.55%

B

600

7.34%

634

7.26%

539

6.53%

573

6.81%

CCC / Split CCC

1,009

11.54%

1,076

11.80%

958

10.87%

1,016

11.46%

Bank Loans December 2014 DMM* Price

January 2015 DMM* Price

February 2015 DMM* Price

March 2015 DMM* Price

Credit Suisse Leveraged Loan Index

558

96.28

558

96.12

521

97.18

518

97.13

Split BBB

328

99.03

311

99.39

297

99.85

297

99.96

BB

403

98.15

399

98.36

369

99.38

370

99.46

Split BB

506

97.71

508

97.73

469

98.80

460

98.95

B

619

96.44

627

96.17

584

97.34

582

97.38

1,044

94.26

1,041

94.35

1,006

95.31

1,047

93.80

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 Q4 2014

Q1 2015

3.0%

2.6%

2.8%

2.8%

3.3%

3.0%

2.7% 1.9%

2.0% -1.2%

1.0%

2.3%

2.1%

-0.6%

-1.0%

-1.6%

2.4%

1.7% 0.8%

0.4%

0.0%

-1.0%

Q1 2015

2.2%

2.2%

0.2%

-0.4%

-0.6%

-0.9%

-2.0% -2.2%

-3.0% -4.0%

-3.0% -4.0%

-4.0% -5.0%

-5.0% Index

Split BBB

BB

Split BB

Source: Credit Suisse. Data as of March 31, 2015.

2

2.0% 1.0%

0.5%

0.0%

-2.0%

Q4 2014 4.0%

4.0%

High-Yield and Bank Loan Outlook | Q2 2015

B

CCC/Split CCC

Index

Split BBB

BB

Split BB

B

CCC/Split CCC

Source: Credit Suisse. Data as of March 31, 2015.

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Macroeconomic Overview Strength Beneath the Surface A number of key events drove performance across fixed-income markets “As real wages start to increase faster,

throughout the first quarter of 2015. At the end of January, the European Central

it will contribute to the increase in

Bank (ECB) exceeded market expectations with its expanded quantitative

disposable income, which will lead to

easing (QE) program as it was larger than expected, open-ended, and had

increases in consumption. This virtuous

some risk-sharing. Other foreign central banks also appear to have undertaken

cycle will cause expansion to continue.

Mario Draghi’s “whatever it takes” approach in protecting or stimulating their

So on balance, we expect economic growth for 2015-2016 to be significantly above the average growth we’ve seen in the post-crisis recovery.”

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

economies—from the Swiss National Bank abandoning its peg against the euro in January, to China’s central bank cutting its benchmark interest rate by 25 basis points for the second time since October 2014. Finally, Janet Yellen’s semiannual testimony to the Senate Banking Committee in February omitted language of bubbles forming in the high-yield market—commentary that Yellen made at the last testimony to the committee that subsequently brought the high-yield rally to a halt in July 2014. Following these events, February saw strong performances in leveraged credit with both high-yield bonds and bank loans posting their strongest monthly returns since January 2012.

Despite these positive developments, recent weakness in U.S. economic data has caused investors to question the sustainability of U.S. growth. After a very strong U.S. GDP growth rate of 5 percent in the third quarter of 2014, growth slipped to 2.2 percent in the following quarter. Looking at the underlying figures for the fourth quarter of 2014, falling net exports subtracted a full percentage point from GDP growth. But net exports—exports minus imports—only looked relatively weak because consumer demand for imports was strong, growing at an annualized rate of 8.9 percent quarter over quarter. In fact, this past December, U.S. companies imported $48.8 billion worth of consumer goods, an all-time record. In the fourth quarter, household consumption was the main driver of GDP growth, up by over 4 percent. We believe this is a positive sign for the U.S. economy.

Unfortunately, investors should expect some continued weakness in the near term as the impact of a severe winter is reflected in economic data. Some weakness is already evidenced by a 2 percent decline in housing starts in January, weakerthan-expected existing home sales in February, and the 0.8 percent decline in retail sales report in February. Last year, similar declines followed a severe winter, which caused the economy to shrink by 2.1 percent in the first quarter, but this soft patch proved to be temporary and the economy quickly regained momentum upon the arrival of the spring thaw. If similar factors are now at play, we should see stronger economic activity in the second quarter and later in the year.

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History shows that imports rise as real

Imports Typically Rise as Personal Consumption Increases

personal consumption expenditure (PCE) grows. This explains much of the apparent weakness in the fourth quarter GDP growth rate, where strong import growth caused a decline in net exports which detracted a full percentage point

Real PCE (LHS)

Imports (RHS)

9%

40%

7%

30%

5%

20%

3%

10%

1%

0%

-1%

-10%

from the growth rate. We view this as a positive sign, demonstrating that the same factors which are leading to a healthy growth rate in consumption, such as an improving labor market and increased consumer confidence, are also causing higher demand for imports.

-3% 1980

-20% 1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

Source: Haver, Guggenheim Investments. Data as of Dec. 31, 2014.

Q1 2015 Leveraged Credit Performance Recap Cautious Optimism Evidenced by Performances The year kicked off with continued unease in the high-yield bond and bank loan sectors, with only modest gains of 0.44 percent and 0.26 percent in January, respectively. The energy sector was the greatest detractor to overall performance as high-yield energy spreads widened further to 901 basis points by the end of January—their widest since May 2009—following another 10 percent decline in oil prices from year-end 2014 levels to close the month at $49 per barrel. Energy-related loans sold off in similar fashion, with average prices declining by 5 percent to $81.54 and discount margins widening to 1,287 basis points. Our view at the beginning of February was that it was already a better time to be a buyer than a seller in energyrelated credits, given the relatively limited room for further downside in oil prices compared to the decline we had already witnessed from the July peak of $107 (based on West Texas Intermediate).

It appears that markets generally concurred with our view, and many prevalent themes from 2014 were reversed in February. Lower-quality ratings outperformed higher quality, with CCC-rated bonds returning 3.7 percent, compared to returns of 2.8 percent and 2.1 percent for B-rated and BB-rated bonds, respectively. CCC-rated loans also outperformed with a 1.7 percent total return compared to returns of 1.5 percent and 1.2 percent for B-rated and BB-rated loans, respectively. Energy-related, high-yield bonds and bank loans outperformed all other sectors in their respective markets, with 6.1 percent and 5.5 percent total returns in February, respectively.

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High-Yield and Bank Loan Outlook | Q2 2015

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The performance in February suggests an optimistic undertone exists in leveraged credit markets. Sentiment weakened in March within the high-yield bond market with a loss of 0.44 percent for the month while bank loan performance held steady at 0.39 percent. In addition to performance, below are key highlights from the first quarter of 2015: § Bank loan fund flows remain negative, but healthy volume of newly formed collateralized loan obligations (CLO) continues to support the loan market, with CLO demand representing 64 percent of primary loan volume. The first quarter of 2015 saw CLO issuance of $29.3 billion, ahead of 2014’s $22.6 billion raise for the same period. § Bank loan supply has been surprisingly weak in 2015, with loan volumes down 40 percent from the same period last year. Light supply against heavy CLO activity has served to mitigate price volatility and also explains the loan market’s steady performance in March, despite increased volatility in the high-yield bond market. § High-yield bond fund flows were strong at the start of the quarter but subsided as investors grew increasingly anxious over continued volatility in energy, which now represents 15 percent of the high-yield market. § In contrast to the loan market, high-yield bond supply for the first quarter is 8 percent higher than last year’s pace over the same period. High-yield borrowers continue to opportunistically refinance existing debt, with 45 percent of this year’s high-yield bond new issue activity categorized as refinancing activity.

Valuations as of the end of the first quarter of 2015 present an attractive entry point for select energy credits, with average spreads across high-yield energy bonds of 818 basis points, well above the historical average of 541 basis points. However, unreserved bullishness in the sector would be premature. Supply and demand factors have not yet settled in the oil market and, as a result, oil prices may continue to test lows. The decline in oil rig count is often cited as an indicator for bottoming oil prices, but history has shown that there is a lag between the reduction in oil rigs and its impact on U.S. oil supply. This was confirmed in February, when the International Energy Agency reported an estimated increase in non-OPEC oil production of approximately 270,000 barrels per day, which was led by increased output in North America. Without production changes from OPEC or the United States, and diminishing storage capacity for oil, the supply-side dynamics in the oil market will continue to put downward pressure on oil prices. Our view is that oil prices may not stabilize until the second half of the year, and investors should continue to stress test individual securities to ensure that they can withstand average oil prices of $45 per barrel over the next two years.

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High-Yield and Bank Loan Outlook | Q2 2015

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The period ahead of a Fed rate hike is generally characterized by strong growth and upward pressure on prices.

Given the strong economic environment that precedes the start of a Fed ratehiking cycle, we’ve found that equities, corporate bonds, and bank loans have outperformed less risky assets in the six months leading up to the last three Fed tightening cycles.

Sector Performances, Six Months Before the Fed Tightening Cycle Begins 10%

9.2%

8% 6% 4.3%

4.3%

4%

3.2%

2% 0% -2%

S&P 500*

Bank Loans

Investment-Grade Corporate Bonds

High Yield Corporate Bonds

-0.2%

-0.2%

Municipal Bonds

Intermediate Treasuries

Source: Bloomberg, Credit Suisse, Barclays, Guggenheim. Data as of March 31, 2015. *S&P 500 average performance based on 13 tightening cycles since 1954. The average performances of bank loans, investment-grade corporate bonds, high-yield corporate bonds, municipal bonds, and intermediate Treasuries is based on the last three tightening cycles (beginning in 1994, 1999 and 2004) due to limited data availability for bank loans.

Beyond energy, we remain bullish on the broader high-yield bond and bank loan markets. The flush of liquidity from global central banks, combined with the relative attractiveness of U.S. Treasuries to German and Japanese government bonds, should help keep U.S. rates capped over the next few years even as the Fed raises interest rates. The relatively low-rate and healthy-economic backdrop should continue to support a historically benign credit environment. History also shows that the best-performing asset classes ahead of a rate hike tend to be risk assets— including equities, corporate bonds, and bank loans.

Outlook for the Upcoming Fed Tightening Cycle Leveraged Credit Offers Value in a Rising Rate Environment The Fed typically tightens monetary policy in reaction to a strengthening economy putting upward pressure on prices. Strong economies, however, are generally not associated with increasing default rates. In fact, in four of the last five tightening cycles (1983, 1986, 1994, and 2004), high-yield default rates ultimately ended lower than they were when the Fed began the tightening process. The only tightening cycle that ended with higher default rates was between 1999-2000.

The yield curve, however, was already much flatter then, with a 30 basis point spread between the 10-year Treasury note and the 2-year Treasury note by the time of the Fed’s rate hike in 1999. As of March 31, 2015, the yield curve is steeper as indicated by the 138 basis points spread between the 10-year Treasury note and the 2-year Treasury note. A steeper yield curve generally bodes well for stronger economic and corporate profit growth as it encourages borrowing and investment.

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Five of six Fed tightening cycles since

Default Rates Typically Decline as the Fed Raises Interest Rates

1980 have ultimately ended with lower default rates compared to default rates when the Fed first hiked interest rates.

HY Default Rates at Start of Fed Tightening Cycle

With history serving as a guide, we

7%

believe the low default rate environment

6%

will continue through the upcoming Fed tightening cycle.

HY Default Rates at Terminal Rate

8%

5%

6.81% 5.79% 3.92%

4.06%

3.66% 2.85%

3%

1%

4.20%

3.85%

4%

2%

4.70%

Historical Average

2.25%

1.89%

1.67% 1.19%

0% 1980

1983

1986

1994

1999

2004

Fed Tightening Cycle Source: Moody’s, Guggenheim. Data as of March 31, 2015.

History would not trump the credit work necessary to make prudent investment decisions, but it helps us develop a roadmap for the future. Historically, low default environments continue until the Fed stops raising interest rates; therefore, our internal research has been focused on estimating how long the next tightening cycle will be. Based on this work, we believe that the terminal rate—or the level at which the Fed will stop hiking rates—lies between 3.1 and 3.4 percent, given the amount of leverage in the U.S. economy. Our models further estimate that the Fed would reach this terminal level in 2017, putting the risk of recession closer to 2018.

Altogether, we believe investors can earn high-yield returns and capture additional spread compression between high-yield and investment-grade bonds given limited credit risk over the next few years.

Lower durations and a significant yield advantage suggest high-yield bonds and bank loans should perform well relative to other fixed-income asset classes as rates rise. Looking at the 2004-2006 Fed tightening cycle, high-yield bonds and bank loans earned 7.5 percent and 5.8 percent annualized returns over the tightening period, close to their starting yields of 8.2 percent and 6.6 percent just before the Fed began raising interest rates. On the other hand, investment-grade bonds, intermediate Treasuries, and agency bonds returned only 2.8 percent, 1.8 percent, and 2.8 percent over the same period, respectively, earning far less than their starting yields as principal losses partially offset earned income.

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High-Yield and Bank Loan Outlook | Q2 2015

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Higher price risk in investment-grade

Annualized Returns, July 2004-June 2006 Fed Tightening Cycle versus Starting Yields

bonds and Treasuries led to principal losses partially offsetting income during the 2004-2006 tightening cycle. High-

Annualized Total Returns: 2004-2006 Fed Hiking Cycle 9%

yield bonds and bank loans fared much

8%

better as a result of higher yields and

7%

lower durations.

6%

June 2004 Yield

8.19% 7.53%

6.59%

5.79%

5%

5.03% 3.85%

4%

3.28%

3% 2.84%

2%

2.80% 1.81%

1% 0% High Yield Corporate Bonds

Bank Loans

Investment-Grade Corporate Bonds

Intermediate Treasuries

Agency Bonds

Source: Credit Suisse, Barclays, Guggenheim. Data as of March 31, 2015.

The yield advantage in leveraged credit is pronounced in the current environment, especially since high-yield bond and bank loan yields have not declined nearly as much as yields in other asset classes. Compared to June 2004 levels, yields across Treasuries, agency bonds, and investment-grade bonds are 68 percent, 57 percent and 42 percent lower, respectively, while high-yield bond and bank loan yields are only 19 percent and 14 percent lower, respectively. One might have expected yields on floating-rate bank loans to have declined the most of nearly any other fixedincome asset class given that the benchmark used to calculate interest payments— the London Interbank Offered Rate (LIBOR)—is at a historically low level. However, the majority of bank loan interest payments are now calculated on a minimum benchmark level which is referred to as a LIBOR floor. LIBOR floors first emerged in 2008 as an investor protection to boost income and to encourage nontraditional buyers, including high-yield bond investors, into the bank loan market. When three-month LIBOR fell to an all-time low of 28 basis points at the end of 2009, LIBOR floors became a prevalent feature in newly issued bank loans. This has helped prevent a significant decline in bank loan coupons and yields, maintaining their competitive yield advantage over other assets classes such as investmentgrade corporate bonds, intermediate Treasuries and agency bonds.

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High-Yield and Bank Loan Outlook | Q2 2015

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High-yield bonds and bank loans have not lost nearly as much of their yield advantage compared to other fixedincome asset classes. While yields offered by Treasuries, agency bonds, and

Significant Yield Advantage Continues to Exist in Leveraged Credit Asset Class Yields as of Q1 2015 7%

5%

by 68 percent, 57 percent and 42

4%

high-yield bond and bank-loan yields are

5.7%

6%

investment-grade bonds have declined percent since June 2004, respectively,

6.6%

2.9%

3%

only 19 percent and 14 percent lower,

2%

respectively.

1%

1.7% 1.1%

0% High Yield Corporate Bonds

Bank Loans

Investment-Grade Corporate Bonds

Intermediate Treasuries

Agency Bonds

Yields at the Beginning of 2004 Fed Hiking Cycle Versus Current Yields 0% -10% -20%

-19.3%

-14.2%

-30% -40% -42.2%

-50% -60%

-56.6%

-70% -80%

-67.8% High Yield Corporate Bonds

Bank Loans

Investment-Grade Corporate Bonds

Intermediate Treasuries

Agency Bonds

Source: Barclays, Credit Suisse, Guggenheim. Data as of March 31, 2015. High-yield bond and bank loan yields are based on the Credit Suisse High Yield Bond and Leveraged Loan Indexes. Investment-grade corporate bond yields are based on Barclays Investment-Grade Corporate Index. Agencies and Intermediate Treasuries are based on subcompents of the Barclays U.S. Aggregate Index.Bank loan yields assume an average 3-year life as calculated by Credit Suisse.

The average floor in the bank loan market today is approximately 1 percent, which means that for the majority of loan coupons to reset higher, LIBOR will need to rise above 100 basis points. Our projected interest-rate path suggests this would not occur until 2016, which many argue could cause demand to weaken from investors who are unaware of the lag. Global conditions make this a fairly small risk, however, as incoming foreign capital flows due to a strengthening dollar and suppressed yields abroad may offset demand slack domestically. The combination of foreign demand, rising coupons, and low durations underscore our view that bank loans will be among the best performing fixed-income asset classes as we enter the next Fed tightening cycle.

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High-Yield and Bank Loan Outlook | Q2 2015

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Investment Implications Active Management Allows for Optimal Positioning Average high-yield bond and bank loan prices of $99.25 and $98.08 today (excluding defaulted bonds and loans), respectively, means that there is limited room for capital appreciation as we move into the next Fed tightening cycle. This limitation, however, is largely borne by passive strategies. Generating returns above broadly followed indices such as the Credit Suisse High Yield Index and Leveraged Loan Index may be achievable through active management, given that active managers retain the flexibility to actively identify selling opportunities and attractive entry points in order to limit downside and capture upside. Actively managed strategies also allow investors to position optimally based on relative value and opportunities in areas that are not broadly represented in the Index. We believe that our ability to negotiate terms and our capacity to participate in more niche markets, such as the middle market, positions us to continue to outperform broader indices.

From a relative value perspective, we believe B-rated credits look attractive. As of March 31, 2015, B-rated bonds offer 214 basis points over higher-rated BB credits based on the subcomponents of the Credit Suisse High Yield Index—well above the historical, non-recession average of 181 basis points. We remain highly selective in CCC-rated credits given the potential for higher volatility after a potentially weak first quarter 2015 GDP print, as we discussed earlier.

More broadly, the recent sell-off in the high-yield market at the end of 2014, which caused spreads to widen, makes this an attractive entry point in leveraged credit.

Ultimately, history may show that this was a good time to be buying high-yield bonds and positioning for a rising rate environment with bank loans.

As we look within the high-yield market

Single-B Bonds Offer Attractive Relative Value

for the most attractive potential returns,

700 bps

single-B rated bonds appear to offer attractive relative value. Single-B bonds offer spreads of 214 basis points over higher-rated BB-bonds, well above the historical average of 181 basis points for this premium.

B-Bonds Minus BB-Bonds 600 bps

High Low Ex-Recession Average Last

500 bps

593 65 181 214

400 bps 181 bps

300 bps

Ex-Recession Average

200 bps 100 bps 0 bps 1986

1990

1994

1998

2002

2006

2010

2014

Source: Credit Suisse, Guggenheim. Data as of March 31, 2015.

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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.

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.

Leveraged buyout activity refers to the acquisition of a company where a significant amount of debt, which may include bonds or loans, is used to finance the transaction.

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 12.31.2014. The assets include leverage of $12.149bn for assets under management and $0.465bn 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 Aviation Partners, LLC, Guggenheim Real Estate, LLC, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.

1

2

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High-Yield and Bank Loan Outlook | Q2 2015

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Contact us New York 330 Madison Avenue New York, NY 10017 212 739 0700

About Guggenheim Investments Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, and has $196 billion1 in total assets across fixed income, equity, and alternatives. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth

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funds, endowments and foundations, consultants, wealth managers, and high-net-

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worth investors. Our 250+ investment professionals perform rigorous research to

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understand market trends and identify undervalued opportunities in areas that are

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often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification and attractive

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long-term results.

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

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$220 billion2 in assets under management. Across our three primary businesses

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of investment management, investment banking, and insurance services, we have

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a track record of delivering results through innovative solutions. With over 2,500

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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.

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