High Yield and Bank Loan Outlook - July 2014

July 2014

High-Yield and Bank Loan Outlook High Quality High-Yield in a Maturing Bull Market Investment Professionals B. Scott Minerd Chairman of Investments and Global Chief Investment Officer Michael P. Damaso Chairman, Corporate Credit Investment Committee Jeffrey B. Abrams

Certain areas of leveraged credit are overvalued, particularly CCC-rated bonds and bank loans, but often some of the best profits come in the final phase of a cycle. Low yields on U.S. Treasury bonds and European sovereign debt have kept the global search-for-yield theme alive and have lured more capital into U.S. credit markets, helping the ongoing rally in high-yield bonds and bank loans, which gained 2.4 percent and 1.2 percent (as represented by the Credit Suisse High Yield Index and Credit Suisse Institutional Leveraged Loan Index) in the second quarter of 2014, respectively. With valuations frothy, we believe now is the time to start moving up in credit quality. Our analysis finds value in BB-rated and B-rated bonds and we are most positive on BB-rated and B-rated bank loans, where discount margins still trade wide of ex-recession averages.

Senior Managing Director,

We remain concerned about weak structures, such as covenant-lite loans, payment-in-kind

Portfolio Manager

bonds and second liens — all growing trends amid increased leveraged-buyout activity.

These trends are adding risk to an already richly valued high-yield bond market and are

Kevin H. Gundersen, CFA

evocative of the weak debt underwriting standards that culminated in the 2008 financial

Senior Managing Director,

crisis. However, a comparison of the current environment to that of 2006 and 2007 shows

Portfolio Manager

that while the market is certainly exhibiting signs of frothiness, we are still early in the speculative phase of the current cycle.

Thomas J. Hauser Managing Director,

Report Highlights

Portfolio Manager

§ CCC-rated corporate bonds and CCC-rated bank loans are the richest groups in

Maria M. Giraldo Senior Associate, Investment Research

leveraged credit and should be avoided. Spreads have some room to run before reaching historically low levels, but now is the time to move up in credit quality. § Our outlook remains positive on BB-rated and B-rated bank loans. Their discount margins still trade wide of ex-recession averages and should tighten once the U.S. Federal Reserve begins raising interest rates. § We continue to emphasize relative value, deep credit analysis, and proper risk management — particularly as we enter the final stretch of the bull market. The value of these tools is highlighted by manager performance during the previous recession, when the bottom 20 high-yield managers underperformed the Credit Suisse High Yield Index by 10 percent, while the top 20 outperformed the Index by 8 percent, on average.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q3 2014

1

Leveraged Credit Scorecard As of Month End

High-Yield Bonds Dec-13 Spread Yield

Apr-14 Spread Yield

May-14 Spread Yield

Jun-14 Spread Yield

Credit Suisse High-Yield Index

436

5.77%

408

5.34%

415

5.29%

403

5.23%

Split BBB

245

4.65%

205

3.69%

208

3.72%

201

3.75%

BB

298

4.96%

276

4.34%

279

4.22%

268

4.16%

Split BB

349

5.17%

343

4.87%

349

4.76%

335

4.66%

B

445

5.75%

416

5.16%

421

5.10%

410

5.07%

CCC / Split CCC

745

7.00%

682

7.81%

690

7.83%

686

7.85%

Bank Loans Dec-13 DMM* Price

Apr-14 DMM* Price

May-14 DMM* Price

Jun-14 DMM* Price

Credit Suisse Institutional Leveraged Loan Index

465

100.05

467

99.60

465

99.79

460

99.91

Split BBB

295

100.11

318

99.70

313

99.85

308

99.99

BB

356

100.26

361

99.83

356

99.97

351

100.06

Split BB

420

100.28

433

99.68

424

99.85

420

99.97

B

501

99.97

495

100.63

493

100.21

485

100.52

CCC / Split CCC

821

98.99

805

99.47

817

99.73

808

99.89

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 Institutional Leveraged Loan Index Returns Q1 2014

Q2 2014

4.0%

3.5% 3.1% 2.8%

3.0% 2.5%

Q1 2014

Q2 2014

4.0%

3.0%

2.4%

3.3%

3.1% 2.6%

2.9% 2.6%

3.0%

2.2%

3.5% 3.0%

2.3%

2.0%

2.0%

1.5%

1.5%

1.0%

1.0%

0.5%

0.5%

0.0%

0.0% Index

Split BBB

BB

Source: Credit Suisse. Data as of June 30, 2014.

Guggenheim Partners

Split BB

B

CCC/Split CCC

2.7%

2.5% 2.0%

1.2% 1.2%

1.0%

1.0% 0.8%

1.2%

1.3% 1.3%

0.9%

0.5%

Index

Split BBB

BB

Split BB

B

CCC/Split CCC

Source: Credit Suisse. Data as of June 30, 2014.

High Yield and Bank Loan Outlook | Q3 2014

2

Macroeconomic Overview Depressed Global Yields Bring Foreign Assets to U.S. Treasuries While the U.S. Federal Reserve is slowly withdrawing stimulus to U.S. financial “After the recent prolonged rally in

markets, low inflation in Europe has prompted the European Central Bank (ECB) to

U.S. fixed income and equities, we are

take more action. On June 5, 2014, the ECB announced additional stimulus, which

now in the late stages of a bull market.

included a negative deposit rate and a targeted Long Term Refinancing Operation

While such markets are difficult to navigate, they can still be profitable.”

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

intended to direct credit to small- and medium-sized enterprises in Europe and boost economic growth in the region. European sovereign bond yields declined before the ECB’s announcement, attracting foreign investors to higher-yielding U.S. Treasuries. This caused Treasury yields to fall, as demand from foreign yieldseekers added to already existing demand from investors seeking a safe-haven from other events, such as the ongoing conflict in Ukraine and the depreciation of China’s renminbi against the U.S. dollar. The 10-year U.S. Treasury yield dropped to as low as 2.44 percent on May 28, the lowest since June 2013. As the ECB continues fighting low inflation, potentially devaluing the euro, we may see U.S. Treasury yields fall again.

The decline in U.S. Treasury and European sovereign bond yields has kept the searchfor-yield theme alive, while duration is becoming a secondary concern and strong demand is pushing U.S. markets further into a realm of overheating. Spreads across several fixed-income asset classes — including certain categories within investmentgrade corporate bonds, municipal bonds, and high-yield corporate bonds — have passed their ex-recession averages and are making their way toward their all-time lows. These valuations have prompted increased speculation that we are in a market bubble, but we do not believe valuation is a good signal of market peaks. There are three phases that typically follow an economic downturn, with the final phase still offering rewards to those who can identify the best value: § During the first phase, asset prices recover as the market emerges from the worst

of the downturn (2009 – 2011). § In the second phase, the economy accelerates as fundamentals fall into place

(2012 – 2013). § In the third and final phase, market speculation begins with a wave of more

aggressive activity such as mergers, acquisitions, leveraged buyouts and even borrowing to pay dividends to private equity sponsors.

Now 60 months beyond the end of the last recession, there has been an increase in aggressive activity as we cross into the final “speculative” phase of the cycle.

We are still some time away from the U.S. Federal Reserve raising interest rates to curb economic growth, suggesting that this cycle is shaping up to be among the longest in history. Nevertheless, even in a normal time frame, credit spreads have historically not widened until about 80 months following the end of the last recession. If this pattern holds, we have at least 20 months before we see spreads change direction.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q3 2014

3

Historically, credit spreads widen

Spreads Widen Approximately 80 Months After Recessions

approximately 80 months following

1200

June 2014 marks the 60th month

1100

following the end of the last recession, and precedent suggests that the credit rally may be sustained for an extended period with the potential for further spread tightening over the next 20 months.

Credit Suisse High Yield Bond Spreads

the end of a recession, on average.

R2=0.604

1000 900 800 700 June 2014

600 500 400 300 200

0

10

20

30

40 50 60 70 80 90 Number of Months Following End of Recession

100

110

120

Source: Credit Suisse, Guggenheim. Data as of June 30, 2014.

Measuring Stages of Overvaluation Time to Step Up In Quality Leveraged credit markets posted gains for the second quarter of 2014, with the Credit Suisse High-Yield and Institutional Leveraged Loan Indexes gaining 2.4 and 1.2 percent, respectively. June was the 12th consecutive month of positive returns for bank loans, with the sector benefiting from $61 billion of collateralized loan obligation (CLO) issuance year to date — now on track to exceed 2013’s volume and potentially set a new annual record. A robust CLO market has offset the reversal in bank loan mutual fund flows, which turned negative in April after 95 weeks of inflows. Falling mutual fund demand for bank loans was caused by the decline in Treasury yields and was not fundamentally driven, so we believe this temporary shift will reverse when interest rates rise. The decline in interest rates was a positive for high-yield bonds, which have outperformed bank loans by 3.1 percent this year, and June marked the 10th consecutive month of positive returns for the sector.

High-yield corporate bond spreads were relatively flat over the quarter. With spreads stable against declining Treasury yields, the Credit Suisse High Yield Index yield declined to 5.2 percent and sits only 10 basis points above the all-time low set last year. Given low yields, high prices and the tightest spreads post-crisis, the relative overvaluation of high-yield bonds has been in the spotlight, leading some to characterize them as extremely rich.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q3 2014

4

At Guggenheim, we rank fixed-income assets by stages showing different gradations of overvaluation. We create spread quartiles by measuring the range between each sector’s all-time low and the ex-recession average, with the fourth quartile indicating that spreads are very close to their all-time low. Our quartile analysis is also supplemented by an evaluation of the instances in which a fixed-income sector trades within each quartile in order to identify those at the greatest risk of retracing.

For our analysis, we split the distance

Quartiles of Overvaluation in Leveraged Credit

between the historical low and the ex-recession average into quartiles, and

Quartile 4

determined whether current spreads

Quartile 3

quartile. The fourth quartile signals that spreads are dangerously close to their historical low. B-rated and BB-rated bank

Overvaluation

lie in the first, second, third, or fourth

Quartile 2 Quartile 1

loans are the furthest away from all-time tights, as their discount margins continue to trade wide of ex-recession averages.

CCC Corporate Bonds

CCC Bank Loans

BB Corporate Bonds

B Corporate Bonds

B Bank Loans

BB Bank Loans

Source: Credit Suisse, Guggenheim. Data as of June 30, 2014.

Index Legend: CCC Corporate Bonds: CS High Yield Index (CCC subset); CCC Bank Loans: CS Institutional Leveraged Loan Index (CCC subset) BB Corporate Bonds: CS High Yield Index (BB subset) B Corporate Bonds: CS High Yield Index (B subset) B Bank Loans: CS Institutional Leverage Loan Index (B subset) and BB Bank Loans: CS Institutional Leveraged Loan Index (BB subset). Please see end of publication for index definitions.

CCC-rated bonds are in the third quartile and are the most overvalued within leveraged credit. We have been warning of eroding safety in the form of high valuation and weaker covenants (Moody’s Investors Service has been tracking covenant strength since 2011 and it fell to its weakest level in February 2014), so we urge investors to become increasingly selective in CCC-rated bonds. Within highyield corporate bonds, we favor B-rated corporate bonds, which are not as richly valued and are also less interest-rate sensitive than BB-rated bonds.

Applying our quartile analysis to bank loans highlights our more positive stance on the floating-rate sector. BB-rated and B-rated bank loans do not register within our stages of overvaluation because discount margins continue to trade wide of their ex-recession averages. The same cannot be said for CCC-rated bank loans, which like CCC-rated high-yield corporate bonds are among the most overvalued.

Historically, we have seen the largest decline in discount margins when short-term interest rates climb and the yield curve flattens as a result of the Fed beginning to tighten. We believe this pattern will repeat and discount margins will tighten as investors benefit from the floating coupons of bank loans.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q3 2014

5

The 10-2 yield curve represents the difference between the 10-year U.S. Treasury yield and the 2-year U.S. Treasury yield. Our table shows that

Bank Loan Discount Margins Narrow as the Yield Curve Flattens (1992-2008) 800 bps

as the yield curve steepens. Data after 2008 is not shown because the Fed’s purchases of U.S. Treasuries have since distorted this relationship, but we believe it will return to normal once the Fed ends its asset purchases and begins tightening monetary policy.

2

3

700 bps

generally, bank loan discount margins decline as the curve flattens, and climb

350 bps 1

600 bps

300 bps Yield Curve 10-2 (RHS)

500 bps

250 bps

Bank Loan DMM (LHS)

200 bps

400 bps

150 bps

300 bps

100 bps

200 bps

50 bps

100 bps

0 bps

0 bps -50 bps 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 6-Months Prior to Fed Tightening

6-Months After Fed Tightening

Bank Loan Discount Margins

10-2 Year Treasury Yield Curve

Bank Loan Discount Margins

10-2 Year Treasury Yield Curve

1 Fed Tightening Cycle 1

329 bps

159 bps

253 bps

44 bps

2 Fed Tightening Cycle 2

275 bps

60 bps

272 bps

32 bps

3 Fed Tightening Cycle 3

363 bps

243 bps

258 bps

-11 bps

Source: Bloomberg, Credit Suisse, Guggenheim. Data as of June 15, 2014.

Entering the Speculative Phase of the Cycle Evolving Supply Trends Remind Markets of Pre-Crisis Excess Rich valuations have room to get richer, but this credit environment evokes memories of pre-crisis excesses. Key trends suggesting that we are in the speculative phase of the current bull market cycle include: § Covenant-lite bank loans becoming increasingly standard, accounting for 62

percent of institutional bank loan issuance during the first half of 2014. § Refinancing activity has declined this year as a share of new issue activity,

representing 41 percent of leveraged credit issuance compared to its 55 percent average between 2009 and 2013. In its place, merger and acquisition (M&A) and leveraged buyout (LBOs) activity has increased to 36 percent, its highest share since 2008. § Higher LBO activity has been accompanied by rising new issue leverage

multiples of 4.9 times, approaching the 2007 level of 5.3 times. Estimated leverage for the full outstanding high-yield market already exceeds 2007 levels.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q3 2014

6

A number of credit metrics today are of concern, but our heat map demonstrates we are early in the speculative phase of the cycle. Yellow numbers above highlight metrics that have deteriorated over the past five years. Metrics highlighted in red have passed 2007 levels while those in green are not currently of concern.

A Heat Map to Track the Current Credit Cycle Issuance 2006

2007

2013

2014 YTD

M&A/LBO as a % of Total Issuance

52%

62%

26%

36%

Refinancings as a % of Total Issuance

24%

22%

51%

41%

Dividend Deals as a % of Total Issuance

7%

6%

8%

9%

Covenant-Lite as a % of Total Loan Issuance

7%

25%

57%

62%

PIK Toggle as a % of Total HY Bond Issuance

5%

11%

4%

2%

2006

2007

2013

2014 YTD

Purchase Price Multiples

8.4x

9.7x

8.8x

9.6x

Equity Contribution as a % of Financing

31%

31%

36%

37%

LBO Leverage (Debt/EBITDA)

5.5x

6.2x

5.5x

5.9x

LBO EBITDA / Cash Interest

2.3x

2.1x

3.1x

3.6x

2006

2007

2013

2014 YTD

5.2x

5.3x

5.0x

4.9x

Leveraged Buyout Activity (LBO)

Fundamental Metrics New Issue Leverage Multiple (Debt/EBITDA) New Issue Interest Coverage (EBITDA/Cash Interest)

2.1x

2.1x

2.9x

3.0x

All High-Yield Leverage Multiple (Debt/EBITDA)

3.6x

3.6x

3.9x

3.8x

All High-Yield Interest Coverage (EBITDA/Cash Interest)

4.2x

3.8x

3.5x

3.9x

Source: S&P Leveraged Commentary & Data (S&P LCD), Bank of America Merrill Lynch, Guggenheim. Data as of June 30, 2014.

For additional details and definitions, please see end of publication.

Covenant-lite loans have been in a worrisome trend since 2012, when they reached 33 percent of total loan issuance. Now, they are almost double that amount at 62 percent of institutional bank loan issuance during the first half of 2014 and they are edging their way to becoming the standard. Investors are having trouble avoiding covenant-lite loans as they now represent 52 percent of the total bank loan market, according to S&P LCD. The prominence of such loans has sparked controversy and bifurcated investors into those who believe the lack of covenants portend higher default rates and lower recovery rates ahead, and those who do not believe covenants indicate greater credit risk.

Those who say the increase in covenant-lite loans is not indicative of a deterioration of standards point to a Moody’s 2011 study, which reviewed recovery rates of covenant-lite loans and a group of loans that defaulted during the financial crisis.

The report found that the covenant-lite group had fewer defaults and a better recovery rate than the broader set of defaulted loans. Lower default rates are not surprising given fewer covenants to trigger defaults in covenant-lite loans, and some argue that covenant-lite loans were reserved for the highest-quality borrowers in the last cycle, which ultimately led to higher recovery rates. For the latter, it is hard to say the same standard applies today, with an overwhelming amount of bank loan issuance being covenant-lite; but careful credit analysis will ultimately trump generalizations about quality.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q3 2014

7

While there is much debate on the topic of covenant-lite loans, there is broad agreement that shifts in the drivers of issuance indicate rising risks in leveraged credit. After refinancing activity driven by falling interest rates overtook primary markets between 2009 and 2013, activity driven by M&A and LBOs has begun to take its place. As our previous table shows, the share of M&A and LBO driven activity is now 36 percent of issuance year to date, up from 26 percent in 2013.

This level is still far from its 62 percent share in 2007, so for now it remains neutral.

The recent flurry of LBO activity has pushed new issue leverage metrics closer to 2007 levels as shown in our table, but for some time borrowers have been trending toward higher leverage. In addition to monitoring leverage, we continue to keep a close watch on interest coverage for new transactions, which remains above 20072008 levels. A deeper examination of recent LBO activity also makes us hesitant to draw direct parallels to 2007. In addition to lower volume, recent deals still have higher equity contributions, lower leverage, and higher interest coverage than was the case in 2007. These metrics suggest that LBO deals today are of higher quality than they were seven years ago and do not reflect the excessive exuberance at the peak of the last cycle.

Lessons from the Last Downturn Credit Selection and Relative Value Matter Credit selection will become increasingly important as it becomes more difficult to identify value in a market that has grown to a record size. We compared the performance of the top 20 and bottom 20 managers during the previous economic downturn to highlight that selecting the right manager can make a significant difference. The top 20 managers and bottom 20 managers, as shown in the chart below, are based on 3-year performance as of December 31, 2009, according to e-Vestment Alliance. During this period, the top 20 managers outperformed the Credit Suisse High Yield Index by 9 percent, on average, while the bottom 20 managers underperformed the Index by 13 percent, on average. Specifically, during the recession between December 2007 and June 2009, the Credit Suisse High Yield Index lost 6 percent, but the top 20 high-yield managers averaged a positive 2 percent return, outperforming the Index by 8 percent, while the bottom 20 managers underperformed the Index by 10 percent, on average. We believe this performance disparity is the result of differences in credit selection, relative value analysis, and risk management.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q3 2014

8

In a downturn, the performance

High Yield Managers Average Cumulative Performance During the Previous Downturn

differential between top and bottom managers can be significant. This is why

30%

careful credit selection and relative value

25%

analysis matters.

20%

Top 20 Managers as of Dec. 31, 2009*

Bottom 20 Managers as of Dec. 31, 2009*

Credit Suisse High Yield Index

26% 17%

15% 10% 4%

5%

2%

0% -5%

-6%

-10% -15%

-16%

-20% January 2007 - December 2009

December 2007 - June 2009 (U.S. Recession)

Source: eVestment Alliance, Guggenheim. Data as of June 30, 2014. *The performance of the top 20 managers and the bottom 20 managers is based on their cumulative 3-year returns as of December 31, 2009. Cumulative returns were calculated by compounding the monthly returns over each specified time period and calculating the average of the cumulative returns for the top 20 and bottom 20 managers separately. The same 20 managers are used for each time period. The managers are derived from the High Yield Universe eVestment Category. Returns are calculated using net returns if available from eVestment, however, not all managers report net performance. If net is not available, eVestment provides gross monthly returns. Therefore average performance of the top/bottom 20 managers may include a mix of net and gross returns.

Extended valuations do not signal the end of the rally, particularly as macroeconomic tailwinds continue to support leveraged credit. The strengthening U.S. economy and declining global yields are mitigating the impact of deteriorating fundamentals, but it remains especially important to be mindful of the balance between risk and return in this environment. Deep credit work and relative-value analysis allows us the potential to capture gains without taking excessive risk as we seek to deliver for our clients.

Guggenheim Partners

High Yield and Bank Loan Outlook | Q3 2014

9

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.

Leveraged loans are represented by the Credit Suisse Institutional Leveraged Loan Index, a sub-index of the Credit Suisse Leveraged Loan Index which contains only institutional loan facilities prices above 90, excluding TL and TLa facilities and loans rated CC, C, or in default. It is designed to more closely reflect the investment criteria of institutional investors.

The Credit Suisse Leveraged Loan Index which 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.

High yield bonds are represented by the Credit Suisse High Yield Index, which is designed to mirror the investable universe of the $US-denominated high yield debt market. Investment-grade bonds are represented by the Barclays Corporate Investment Grade Index, which consists of securities that are SEC-registered, taxable and dollar denominated. The index covers the U.S. corporate investment-grade fixed income bond market.

Treasuries are represented by the Barclays U.S. Treasury Index, which includes public obligations of the U.S. Treasury with a remaining maturity of one year or more.

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.

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.

Yield-to-worst is the lowest potential yield that can be received on a bond without the issuer actually defaulting.

Covenant-lite Loan is a type of loan whereby financing is given with limited restrictions on the debt-service capabilities of the borrower. The issuance of covenant-lite loans means that debt is being issued, both personally and commercially, to borrowers with less restrictions on collateral, payment terms, and level of income.

Payment-in-kind Bonds is a type of bond that pays interest in additional bonds rather than in cash. The bond issuer incurs additional debt to create the new bonds for the interest payments. Payment-in-kind bonds are considered a type of deferred coupon bond since there are no cash interest payments during the bond’s term.

Duration refers to a measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. Duration is expressed as a number of years. Rising interest rates mean falling bond prices, while declining interest rates mean rising bond prices.

Guggenheim Partners

EBITDA stands for earnings before interest, taxes, depreciation and amortization and is essentially net income with interest, taxes, depreciation, and amortization added back to it, and can be used to analyze and compare profitability between companies and industries because it eliminates the effects of financing and accounting decisions. 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.

RISK CONSIDERATIONS Fixed-income investments are subject to credit, liquidity, interest rate and, depending on the instrument, counterparty 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 Partners’ assets under management are as of 03.31.2014 and include consulting services for clients whose assets are valued at approximately $39 billion.

1

Guggenheim Investments’ total asset figure is as of 03.31.2014 and includes $12.9 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 Advisors, LLC, Guggenheim Partners Europe Limited, Transparent Value Advisors, LLC, and Guggenheim Partners India Management. Values from some funds are based upon prior periods.

2

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. 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 | Q3 2014

10

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

About Guggenheim Partners Guggenheim Partners is a global investment and advisory firm with more than $210 billion1 in assets under management. Across our three primary businesses of investment management, investment banking, and insurance services, we have a track record of delivering results through innovative solutions. With over 2,500

Chicago

professionals based in more than 25 offices around the world, our commitment

227 W Monroe Street

is to advance the strategic interests of our clients and to deliver long-term results

Chicago, IL 60606

with excellence and integrity. We invite you to learn more about our expertise

312 827 0100

and values by visiting guggenheimpartners.com and following us on Twitter at twitter.com/guggenheimptnrs.

Santa Monica 100 Wilshire Boulevard Santa Monica, CA 90401

About Guggenheim Investments

310 576 1270

Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners. With more than $180 billion in assets under

London

management2, we offer innovative solutions for fixed income, equity, and alternative

5th Floor, The Peak

investors. Our commitment is to advance the strategic interests of our clients and to

5 Wilton Road

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

London, SW1V 1LG +44 207 052 8272

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

GPIM13655 Guggenheim Partners

High Yield and Bank Loan Outlook | Q3 2014

11