High Yield and Bank Loan Outlook – July 2015

July 2015

High-Yield and Bank Loan Outlook Evaluating Opportunities in Energy Investment Professionals B. Scott Minerd Chairman of Investments and Global Chief Investment Officer

Taking the strengthening U.S. economic data into account, the likelihood that the U.S. will suffer a recession in the next couple of years remains extremely remote.

Yet, despite the positive economic backdrop in the first half of 2015, lackluster returns across equity and fixed-income markets alike indicate that markets may be fully priced. As the risk of a summer correction grows in a complacent market,

Jeffrey B. Abrams

we believe investors should build cash reserves by reducing exposure to low

Senior Managing Director,

quality and potentially overpriced assets.

Portfolio Manager

Investors seeking to redeploy some of the capital raised by selling overpriced

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

assets may still find undervalued opportunities in energy, where we remain selective but have been capturing yield premiums in excess of 2–3 percent over the broader high-yield market. With volatility returning to the oil market at the end of June, our focus remains on companies that have the ability to survive an

Thomas J. Hauser

environment where oil prices are likely to remain volatile and subdued over the

Managing Director,

next few years.

Portfolio Manager

Report Highlights

Maria M. Giraldo

§ The Credit Suisse High Yield and Leveraged Loan indices posted modest gains

Vice President, Investment Research

of 0.3 percent and 0.8 percent in the second quarter of 2015, respectively, bringing year-to-date returns to 2.9 percent in both markets. § Tepid year-to-date returns of less than 3 percent across all risk assets including equities, preferreds, bank loans, and high-yield bonds suggest the summer lull has begun. Investors should raise cash positions by selling overpriced assets in preparation for continued weakness over the remainder of the summer. § Investors seeking to redeploy capital in undervalued opportunities may still find attractive, credit-worthy investments in the high-yield energy market where average yields of 8.8 percent look attractive against the broad fixed-income universe.

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High-Yield and Bank Loan Outlook | Q3 2015

1

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

April 2015 Spread Yield

May 2015 Spread Yield

June 2015 Spread Yield

Credit Suisse High-Yield Index

564

7.10%

513

6.36%

504

6.35%

535

6.86%

Split BBB

250

4.16%

234

3.86%

257

4.16%

275

4.55%

BB

364

5.22%

335

4.71%

334

4.79%

358

5.23%

Split BB

462

6.16%

401

5.15%

393

5.10%

416

5.55%

B

600

7.34%

549

6.64%

531

6.54%

555

7.01%

CCC / Split CCC

1,009

11.54%

900

10.15%

899

10.15%

984

11.18%

Bank Loans December 2014 DMM* Price

April 2015 DMM* Price

May 2015 DMM* Price

June 2015 DMM* Price

Credit Suisse Leveraged Loan Index

558

96.28

502

97.65

506

97.41

524

96.72

Split BBB

328

99.03

285

100.04

293

99.91

294

99.72

BB

403

98.15

357

99.88

364

99.50

374

99.16

Split BB

506

97.71

445

99.57

443

99.47

457

99.19

B

619

96.44

558

98.04

558

98.00

583

97.18

1,044

94.26

1,008

94.91

1,041

93.83

1,079

92.71

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 Q1 2015

Q2 2015

Q1 2015

Q2 2015

4.0%

4.0% 3.3% 3.0% 2.6%

2.8%

2.8%

3.0%

2.7%

2.0%

1.9%

2.0%

2.3%

2.1%

1.0% 0.1%

0.0%

2.2%

0.7%

0.8%

1.1%

0.9%

0.7%

0.0%

-0.1% -0.6%

-1.0% Index

Split BBB

-1.0% BB

Split BB

Source: Credit Suisse. Data as of June 30, 2015.

2

0.8%

0.5%

0.3%

2.2%

1.7%

1.2% 1.0%

2.4%

High-Yield and Bank Loan Outlook | Q3 2015

B

CCC/Split CCC

Index

Split BBB

BB

Split BB

B

CCC/Split CCC

Source: Credit Suisse. Data as of June 30, 2015.

Guggenheim Investments

Macroeconomic Overview The Price of Easy Money The weak first estimate of first quarter Gross Domestic Product (GDP) growth, “The effects of easy money have led

which came in at only 0.2 percent on April 29, should have spurred a risk-off trade,

to an acceleration in growth and

driving investors into Treasuries and causing rates to fall. Instead, the 10-year

indicate that the Fed is probably falling

Treasury yield climbed from 2.04 percent to 2.29 percent between April 29th

behind the curve. That is causing

and May 19th. This unusual sell-off may be partially attributed to the spill-over

corporate sector borrowing costs to

effects of the European Central Bank’s (ECB) implementation of its expanded asset

be supplemented heavily, encouraging companies to take on more leverage, which I believe will ultimately make corporate borrowers most vulnerable to the next economic downturn.”

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

purchase program. As European sovereign bond markets have become distorted by the ECB’s overwhelming presence, liquidity is diminishing and exacerbating volatility. Consequences of this are evident in the high correlation between German 10-year Bunds and U.S. 10-year Treasury yields since the ECB began its asset purchases on March 9th compared to the beginning of the year.

When the final U.S. trade data was released in early May showing the largest trade deficit since 2008, market expectations of a negative revision to first quarter GDP granted the bond market a brief respite from volatility. When the second estimate on May 29th confirmed that the U.S. economy contracted by 0.7 percent, markets again defied expectations of a risk-off rally with the 10-year Treasury note selling off even more sharply in the first 9 trading days in June. Yields rose by 36 basis points to 2.48 percent, the highest yield in over 8 months. The 10-year Treasury ended the quarter yielding 2.4 percent.

Ongoing liquidity distortions in European markets continued to play a role in U.S. Treasury yields in June, but stronger economic data was at least more consistent with the second Treasury sell-off. U.S. nonfarm payrolls jumped by 280,000, above consensus expectations of 210,000, while wage growth accelerated at 2.3 percent year-over-year based on U.S. average hourly earnings—the strongest since August 2013. In the housing market, the May release of S&P / Case-Shiller 20-city Home Price index data showed home prices accelerated 5.04 percent on a year-over-year basis in March. Housing permits, which are a leading indicator of housing activity, rose 11.8 percent in May which was better than the forecasted 3.5 percent decline.

Among the most positive surprises was the return of the consumer, with the May retail sales report showing a 1.2 percent jump, which should contribute to a positive 2nd quarter GDP growth rate.

We are well past the recovery phase in our economy as the underpinnings show promising signs of growth. At this stage of the business cycle, corporations should be focusing on projects that create organic and sustainable future growth.

Instead, we are seeing a rise in what we consider less productive uses of capital, such as mergers and acquisitions (M&A). For the year, the U.S. has completed $253 billion of M&A-related equity transactions with an additional $578 billion pending. Together, this $831 billion total represents a 16.4 percent increase from

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High-Yield and Bank Loan Outlook | Q3 2015

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The first leg of the U.S. Treasury sell-

Unforeseen Consequences of European Quantitative Easing

off may be attributed to diminishing liquidity in the European sovereign bond market. Evidence of the spillover effect is the recent sell-off of German 10-year

U.S. 10-Year Treasury Yield (LHS) 2.9%

the Bund’s history. As the chart shows, movements in U.S. Treasuries have become highly correlated to changes in German Bund yields since the ECB began implementing its asset purchase program on March 9, 2015.

1.05%

Correlation: 96%

0.90%

2.7%

Bunds, where yields rose by nearly 800 percent—the sharpest sell-off in

Correlation: 6%

German 10-Year Bund Yield (RHS)

2.5%

ECB implements expanded asset purchase program

0.75%

2.3%

0.60%

2.1%

0.45%

1.9%

0.30%

1.7%

0.15%

1.5%

0.00%

January 2015

February 2015

March 2015

April 2015

May 2015

June 2015

Source: Bloomberg, Guggenheim Investments. Data as of June 30, 2015.

the same period last year. In the high-yield bond and institutional loan markets, M&A represented 35 percent and 61 percent of primary market activity during the first half of 2015, respectively, up from only 27 percent and 45 percent of primary market activity during the first half of 2014, respectively.

The re-emergence of M&A transactions suggests to us that corporations are further along in the current cycle than the U.S. Federal Reserve is interpreting.

Unfortunately, the siphoning of capital into non-productive activities lowers the potential output of the economy over time and as the Fed falls further behind the curve, the potential for long-term consequences grow while businesses fund projects with low internal rates of return using cheap capital. Current trends are sowing the seeds for future corporate defaults during the next downturn, when it becomes more difficult and more expensive to borrow, but a number of indicators suggest to us that this risk remains a few years away.

As recent new issue trends conjure memories of frothy 2006–2007 markets, talks of a bubble—where an asset class reaches unjustifiably high valuations potentially not seen before—have returned. Given that high-yield bond spreads remain above 500 basis points, wide of the all-time tights of 268 basis points in 2007, we do not believe we are witnessing a bubble. In the near-term, we continue to identify plenty of profitable and credit-worthy investments, and as we discuss later in this report, some of those opportunities are in energy. Investors who flee credit because they are watching the seeds of default sown today will miss valuable opportunities. Portfolio rebalancing, however, should occur in gradual adjustments over the course of the business cycle as risks migrate from one sector to another. Investors should remain alert to companies operating on weaker foundations as these will be the first to fall in the face of a sudden reversal of fortune in the market.

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High-Yield and Bank Loan Outlook | Q3 2015

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Q2 2015 Leveraged Credit Performance Recap Lackluster Returns Indicate a Potential Summer Lull Awaits The Credit Suisse High Yield and Leveraged Loan indices posted very modest gains of 0.3 percent and 0.8 percent for the second quarter of 2015, respectively, as extreme weakness in June stemming from the ongoing saga in Greece weighed on the market. Over the quarter, high-yield bond spreads tightened by 5 basis points, from 540 basis points to 535 basis points, and average yields rose from 6.6 percent to 6.9 percent due to rising Treasury yields. Bank loan discount margins slightly widened by 6 basis points from 518 basis points to 524 basis points while yields rose from 5.7 percent to 5.9 percent.

New collateralized loan obligations forming (CLOs) against weak loan supply continues to be one of the main drivers of stability in the loan market. Institutional loan issuance totaled only $142 billion during the first half of the year, down 41 percent from the same period last year, while CLO volume has largely kept at last year’s pace with a total of $59 billion raised through June 2015, down only 3 percent from the same period last year. Strong CLO issuance has represented 57 percent of primary loan volume and continues to mute unsteady mutual fund flows which stand at negative $3.8 billion for the year. With $400 billion of CLOs outstanding and the majority still within the reinvestment period, we expect demand for loans will remain stable even if mutual fund outflows continue.

High-yield bond supply remains strong, totaling $186 billion for the year through June, slightly ahead of the first half of 2014. While the market was able to absorb heavy supply in the first two months of the quarter, June’s rate volatility and growing default risk from Greece weighed on sentiment in the high-yield bond market, causing an uptick in spread volatility and leading to a 1.4 percent loss for the month. Reflecting weaker sentiment, high-yield fund outflows totaled $5.8 billion in the second quarter but remain positive for the year at $4.2 billion.

The combination of higher rate volatility, relative value opportunities, and strong U.S. economic data has allowed risk assets, including equities, high-yield bonds and bank loans to outperform less risky Treasuries and investment-grade corporate bonds through June 2015. Yet, despite the fact that risky assets are leading the pack in performance, lackluster returns across all of these asset classes suggest that markets may be fully priced. The emergence of new capital may generate incremental returns, but we do not see a near-term catalyst which would drive new capital to risky assets. For this reason, we continue to operate under the call of staying up in quality, and believe it would be prudent to build some cash reserves for the summer by reducing exposure to overpriced, low quality assets.

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High-Yield and Bank Loan Outlook | Q3 2015

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Strong U.S. economic data which followed the negative first quarter U.S. GDP figure have kept investors optimistic over U.S. growth, allowing risk assets to outperform Treasuries and investment-grade corporate in 2015.

However, lackluster returns for the year against a positive backdrop suggest most investors have already placed their bets and are waiting for returns to materialize. Against such complacency, we recommend reducing exposure to potentially overvalued, low quality assets as the summer lull sets in.

2015 YTD Performances by Asset Class 4% 3%

2.87%

2.90%

Leveraged Loans

High Yield Corporates

2.00%

2% 1.23% 1% 0.03%

0% -1%

0.35%

-0.92%

-2% IG Corporates

Treasuries

Agency MBS

S&P 500

Preferreds

Source: Credit Suisse, Barclays, Bloomberg, Guggenheim. Data as of June 30, 2015. High-yield bond and bank loan returns are based on the Credit Suisse High Yield Bond and Leveraged Loan Indexes. Investment-grade corporate bond returns are based on Barclays Investment-Grade Corporate Index. Treasuries and Agencies MBS returns are based on the subcomponent of the Barclays U.S. Aggregate. Preferred securities returns are based on the BofA Merrill Lynch Core Fixed Rate Preferred Securities Index.

One area where diligent investors may still find undervalued opportunities is in the energy sector. Although we continue to experience volatile oil prices, as evidenced in the final days of June and early July, energy credit valuations have partially recovered. As of the end of the first half of 2015, energy spreads have tightened to 706 basis points from a wide of 901 basis points over the past six months, based on month-end levels. Plenty of upside remains on a total return basis with the average high-yield energy price at 89 percent of par as of the end of June 2015, only slightly above the 6-month low of 86 percent of par. Energy high-yield bonds offer 8.8 percent yields on the secondary market–the second highest yielding sector and well above the 6.9 percent yield for the Credit Suisse High Yield Index.

The last time average yields for the index were above 8 percent was in December 2011. Current yields in the energy space are nearly impossible to find in other markets.

The key will be to distinguish between good and bad credits. In the next section, we discuss some of primary metrics to review in search of credit-worthy energy investments, including price exposure, regional exposure, and liquidity runway.

In this report, we focus primarily on Exploration and Production (E&P) and Oil Services and Equipment (oil services), two subsectors which experienced the greatest volatility during the market’s mass exodus in 2014.

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High-Yield and Bank Loan Outlook | Q3 2015

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Finding Credit-Worthy Bonds Amid a Mixed Fundamental Backdrop The First-Order Effect: Exploration and Production As we saw between July 2014 and December 2014, the market clearly took on a sell-first, ask-later approach as it swiftly re-priced energy debt to reflect an immediate exposure to a 55 percent drop in oil prices. The magnitude of the correction highlighted the energy sector’s high sensitivity to oil and gas prices, especially those in Exploration and Production (E&P). For this reason, a key metric to evaluate is oil and gas price exposure.

At a high level, price exposure suggests stable performance in E&P in 2015 but investors should expect some volatility in 2016. According to Barclays, from a group of 38 high-yield E&P companies, 87 percent have hedged some portion of 2015 oil production at an average oil price of $87.42 per barrel. Of those with existing oil production hedges, 64 percent of 2015 oil production is hedged, on average. Similarly, 68 percent of E&P companies have a portion of gas production hedged at an average gas price of $4.17 per million British Thermal Units (MMBTU), which is above gas prices of $2.77 MMBTU as of June 30, 2015. Of those with existing hedges on gas prices, 63 percent of gas production is hedged, on average.

Price exposure will be very important to monitor in 2016 as the majority of 2015 hedges will expire. Of the companies with 2015 hedges, the average percent of production hedged in 2016 drops to 31 percent for oil and 30 percent for gas.

Companies with some form of existing hedge in 2016 are hedged at an average price of $79 per barrel for oil and $4.0 MMBTU for gas. The remaining universe is faced with a market-timing conundrum—whether to hedge oil and gas production at current levels or hope that energy prices rebound.

Oil producers typically hedge their

Hedged E&P Production of Oil & Gas

exposure to oil and gas prices through

Average Percentage of Oil Production Hedged Average Percentage of Gas Production Hedged

the derivatives market. As of the end of June 2015, 87 percent of a universe of

75%

38 high-yield E&P companies tracked by

64%

63%

Barclays have hedged some portion of oil and gas production. Of those, 64 percent and 63 percent of oil and gas production

50%

has been hedged, respectively. For the same universe, production hedged drops to 31 percent and 30 percent for oil and gas in 2016, respectively. Investors must

31%

30%

25%

carefully monitor earnings in 2016 as a large portion of production is expected to be entirely exposed to oil and gas price volatility based on current hedges.

0% 2015

2016

Source: Barclays. Data as of June 30, 2015.

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High-Yield and Bank Loan Outlook | Q3 2015

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While hedges can mitigate earnings volatility, exposure to different oil plays and even specific regions within the oil plays may protect or hurt an E&P company.

For this we look at regional exposures. For example, “sweet spots” within the oil plays represent a more economically efficient opportunity for oil producers because it is easier and cheaper to produce oil from these regions. According to IHS Inc., wells situated in the sweet spot of the Eagle Ford play can remain profitable even at oil prices of nearly $34 per barrel while the worst region in the same play breaks even at nearly $120 per barrel. The large variability in a play’s productivity means that companies operating in non-core areas are generating lower internal rates of return by expending more resources than would otherwise be required in the sweet spots. The swift repricing and subsequent rebound in the E&P sector suggests to us that investors disregarded factors such as existing hedges and regional exposures as they shed energy debt, which creates opportunity for savvy investors.

The Second-Order Effect: Oil Services & Equipment The oil services subsector continues to face numerous headwinds as it experiences the second-order effect of lower oil prices. This segment consists of companies that manufacture oil and gas rigs and other equipment related to pumping and drilling.

They also provide energy-related services such as repairing machinery, cleaning, or testing. The subsector is generally considered to be highly cyclical, fluctuating alongside business cycles as well as material changes in oil prices. However, they typically enjoy contracts that can last for several months or even years. In the event of contract termination, their contracts may allow them to earn early termination fees–which highlights the importance of overlaying legal analysis over fundamental credit work to evaluate revenue sensitivity.

In the midst of declining oil prices in the second half of 2014, oil services high-yield bond spreads widened by 186 percent, even more so than in the E&P space, from 412 basis points at the end of June 2014 to 1,177 basis points at its peak in January 2015 based on the Credit Suisse High Yield index. The jump in risk premiums reflected market expectations that E&P companies would immediately cut capital spending plans and drilling activity, contract fewer rigs and eventually demand concessions from oil services as they sought to reduce operating costs. According to Standard and Poor’s, E&P companies asked for 15–20 percent price reductions from oil services in the first quarter of 2015 which intensifies competition in a subsector that is already stressed. Under the current oil price environment, it is likely that competition in oil services will increase in 2016 as E&P earnings come under pressure from expiring hedges.

The oil services sector may remain stressed for a sustained period of time, and therefore its liquidity runway is crucial as it reveals how long a company can meet interest payments and stay solvent against heightened price pressure

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High-Yield and Bank Loan Outlook | Q3 2015

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The majority of subsectors within energy

Total Available Line of Credit, by Energy Subsector

have the majority of their line-of-credit available to be drawn. In fact, many

Q2 2014

Q3 2014

Q4 2014

Q1 2015

100%

companies have been able to raise capital through debt and equity markets to pay down revolvers. These trends

82% 75% 65% 65%

suggest that energy companies have not

57% 55% 54% 54%

been faced with an immediate liquidity need as they adjust to the new energy

77% 76% 75%

80% 73%

70% 63%

56%

53%

50%

environment.

25%

0% Exploration & Production

Midstream

Service & Equipment

Refining

Source: Bloomberg, Guggenheim. Data as of March 31, 2015. Only includes companies in the Credit Suisse High Yield index where we were able to obtain line-of-credit availability for the past four quarters.

and competition. We estimate that oil services have approximately 75 percent of their total line of credit available to be drawn, on average, as of the end of the first quarter of 2015, which suggests that liquidity in oil services has been manageable. Availability of these credit lines may change significantly from one quarter to another as the size of the credit lines are linked to the value of the energy company’s assets, which may be adjusted downward quickly. In the future, we expect there will be new opportunities for alternative capital providers if banks reduce lending to the industry. In the near-term, the lack of upcoming maturities (only 8 percent of oil services issuers in the Credit Suisse High Yield Index have maturing debt within the next two years) and continued access to capital markets should allow companies with sufficient liquidity to survive oil prices at current levels.

Further analysis in oil services requires segmenting offshore from land drillers and evaluating rig quality, rig types, strength of industry relationships, and regional diversification—to name a few additional qualitative features. At 11.6 percent yields, investors can uncover valuable opportunities that are difficult to find elsewhere in a yield-deprived market.

Access to Capital is Key Despite looming uncertainties for the oil market and the macro-overhang for energy companies, investor sentiment has remained optimistic. The combined capital flows from equity, high-yield bond and institutional leveraged loan issuance would not reveal that a major macro-level disruption took place; oil and gas companies have raised $53 billion during the first half of 2015, 28 percent above the average of the first half of each year in the past decade.

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High-Yield and Bank Loan Outlook | Q3 2015

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With new money continuing to flow to

Capital Continues to Flow to Energy

the energy sector, borrowers have been able to raise additional capital needed to withstand the low oil price environment.

Continued access to capital is crucial in a capital intensive industry, but recent trends confirm capital continues to flow to energy, limiting default risk in the near-term.

Equity Issuance

Institutional Leveraged Loans

High Yield Bonds

$70Bn $60Bn 2005 - 2014 Average: $41.8B

$50Bn $40Bn

$10Bn $0Bn

7 4 12 7

14 9

7

2005 HI 2006 HI 2007 HI

29

22 8

24

29

25

13

$30Bn $20Bn

29

12 9

17

19

17 9

12

13

6

4

4

17

18

18

20

19

9

9 2011 HI

2012 HI

2013 HI

2014 HI

2015 HI

2008 HI 2009 HI

2010 HI

Source: Bloomberg, S&P LCD, Guggenheim. Data as of June 30, 2015. “H1� signifies first half of the year.

Abundant energy investment opportunities in the primary market have not come at the expense of spread and yield to the investor. Newly issued U.S. highyield bond spreads for oil and gas have averaged 523 basis points in the first half of 2015, compared to only 378 basis points in the first half of 2014. Newly issued U.S. institutional term loans have priced at an average of 556 basis point spreads, compared to 478 basis points in the first half of 2014. Many new debt offerings represent debt that is more senior in the capital structure to existing debt, which explains why new issue spreads are tighter than secondary spreads. While this can be viewed as an opportunity to invest in debt that is more secure in the event of a default, it also highlights the fact that investors should never overlook weak bond indentures when evaluating opportunities.

Investment Implications The market appears to have returned to the energy space with such conviction that some may interpret it as a sign that the worst is behind us. While there are tailwinds supporting the energy market in the near-term, unreserved bullishness would still be premature in a market that has not yet seen the full impact of lower oil prices.

The 1998-1999 oil bear market gives testament to the necessity of vigilance.

Oil prices reached a six-year peak in January 1997, but prices tumbled steadily over the following two years on the back of a supply glut. Oil prices fell nearly 60 percent between January 1997 and December 1998. Despite falling oil prices, high-yield energy bonds continued to trade at a premium to par until July 1998, 18 months after the oil bear market began. Subsequently, investors holding premium bonds were caught off-guard when defaults occured, and high-yield energy bond prices subsequently fell to an average of 78 percent of par.

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High-Yield and Bank Loan Outlook | Q3 2015

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After reaching a peak of $24 per barrel,

Energy Defaults Lagged by Two Years During the 1998 Oil Bear Market

oil prices began falling in January 1997,

Oil Prices (WTI, $/Barrel, normalized at 100, LHS)

tumbling 27 percent over the following 12 months. By December 1998, oil prices had fallen nearly 60% from its January

160

HY Energy Prices (normalized at 100, LHS) BAML Energy Default Rate (RHS) 14%

140

12%

120

10%

100

8%

80

6%

60

4%

40

2%

1997 peak to $11 per barrel. As the market failed to reprice for heightened risk, it was caught off-guard when defaults evenetually emerged 18 months after oil prices began to fall.

20 Jan-97

0% Jun-97

Nov-97

Apr-98

Sep-98

Feb-99

Jul-99

Dec-99

May-00

Oct-00

Mar-01

Source: Bank of America Merrill Lynch, Bloomberg, Guggenheim. Data as of June 30, 2015.

The 1998 oil bear market contrasts with today’s experience given that today’s market quickly re-priced bonds to reflect the new oil environment. The magnitude of the energy market’s repricing of high-yield risk leads us to believe that certain credits have been unfairly penalized alongside strong ones, but investors should expect some volatility ahead when additional price pressure and higher borrowing costs cause defaults to materialize in greater numbers. Evaluating opportunities requires highly tailored credit analysis across the various subsectors which operate in distinct businesses and a thorough understanding of the sensitive relationship between oil companies and their stakeholders.

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High-Yield and Bank Loan Outlook | Q3 2015

11

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

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

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

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

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

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

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

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

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

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

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

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

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

Past performance is not indicative of future results. There is neither representation nor warranty as to the current accuracy of, nor liability for, decisions based on such information. This article is distributed for informational purposes only and should not be considered as investment advice, a recommendation of any particular security, strategy or investment product, or as an offer of solicitation with respect to the purchase or sale of any investment.

This article should not be considered research nor is the article intended to provide a sufficient basis on which to make an investment decision. The article contains opinions of the author but not necessarily those of Guggenheim Partners, LLC, its subsidiaries, or its affiliates. Although the information presented herein has been obtained from and is based upon sources Guggenheim Partners, LLC, believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. The author’s opinions are subject to change without notice. Forward-looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources.

Information contained herein has been obtained from sources believed to be reliable but is not guaranteed as to accuracy.

This article may be provided to certain investors by FINRA licensed broker-dealers affiliated with Guggenheim Partners, LLC. Such broker-dealers may have positions in financial instruments mentioned in the article, may have acquired such positions at prices no longer available, and may make recommendations different from or adverse to the interests of the recipient. The value of any financial instruments or markets mentioned in the article can fall, as well as rise. Securities mentioned are for illustrative purposes only and are neither a recommendation nor an endorsement. Individuals and institutions outside of the United States are subject to securities and tax regulations within their applicable jurisdictions and should consult with their advisors as appropriate.

Guggenheim Funds Distributors, LLC, Member FINRA/SIPC, is an affiliate of Guggenheim Partners, LLC. Guggenheim Investments total asset figure is as of 03.31.2015. The assets include leverage of $12.63bn for assets under management and $0.50bn for assets for which we provide administrative services. Guggenheim Investments represents the following affiliated investment management businesses: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.

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Guggenheim Partners’ assets under management are as of 03.31.2015 and include consulting services for clients whose assets are valued at approximately $47bn.

©2015, Guggenheim Partners, LLC. No part of this article may be reproduced in any form, or referred to in any other publication, without express written permission of Guggenheim Partners, LLC. GPIM18489

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High-Yield and Bank Loan Outlook | Q3 2015

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