Opportunities in Middle-Market Debt

October 2014

High-Yield and Bank Loan Outlook Opportunities in Middle-Market Debt Investment Professionals B. Scott Minerd Chairman of Investments and Global Chief Investment Officer Michael P. Damaso

Leveraged credit suffered from heightened volatility over the third quarter as mutual fund investors withdrew from the sector amid concerns about frothy valuations and talk of a credit bubble. We believe the high-yield bond market correction this quarter is healthy and overdue, but investors can expect choppier waters ahead. One segment we believe may help limit near-term volatility risk while capturing strong returns is middlemarket debt.

Chairman, Corporate Credit

One way that we identify middle-market debt is based on deal size of up to $750 million,

Investment Committee

and we specifically find value in those between $300 million and $750 million, which we classify as “upper middle-market.” As a whole, middle-market debt historically had

Jeffrey B. Abrams

many attractive features relative to larger debt issues, including higher yields, better

Senior Managing Director,

annualized returns, lower volatility, higher recoveries, a comparable default history and

Portfolio Manager

a stable investor base.

Kevin H. Gundersen, CFA

Report Highlights

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

§ The Credit Suisse High-Yield and Leveraged Loan Indexes posted mixed performance through the quarter, declining by 1.9 percent and 0.3 percent, respectively. This was the first correction in nearly a year, and we view it as healthy and overdue. § With the potential for more volatility ahead, one segment that may help limit volatility while capturing strong returns is middle-market debt. § Middle-market debt has historically been held by a smaller, dedicated investor base — something that we believe has historically helped generate higher premiums for less volatility. § During the third quarter, middle-market corporate bonds, as represented by the Merrill Lynch High Yield Index, lost an average of 1.4 percent, compared to a 2.3 percent loss for high-yield bonds with greater than $750 million outstanding.

Middle-market debt has outperformed larger debt by 58 basis points annualized since 1997 with less volatility. We believe the middle-market segment can continue to add significant value to our credit strategies.

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High-Yield and Bank Loan Outlook | Q4 2014

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Leveraged Credit Scorecard As of Month End

High-Yield Bonds Dec-13 Spread Yield

Jul-14 Spread

Yield

Aug-14 Spread Yield

Sep-14 Spread Yield

Credit Suisse High-Yield Index

436

5.77%

451

5.94%

428

5.50%

485

6.36%

Split BBB

245

4.65%

216

3.99%

213

3.81%

231

4.11%

BB

298

4.96%

305

4.70%

288

4.30%

336

5.05%

Split BB

349

5.17%

374

5.35%

354

4.90%

398

5.68%

B

445

5.75%

468

5.89%

437

5.40%

504

6.41%

CCC / Split CCC

745

7.00%

723

8.53%

714

8.21%

820

9.56%

Bank Loans Dec-13 DMM* Price

Jul-14 DMM*

Price

Aug-14 DMM* Price

Sep-14 DMM* Price

Credit Suisse Institutional Leveraged Loan Index

465

100.05

470

98.65

477

98.59

510

97.67

Split BBB

295

100.11

288

99.59

291

99.56

312

99.06

BB

356

100.26

349

99.63

353

99.47

388

98.59

Split BB

420

100.28

430

99.70

434

99.57

469

98.78

B

501

99.97

509

99.34

516

99.23

547

98.34

CCC / Split CCC

821

98.99

881

97.75

892

97.53

952

96.10

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 Q2 2014

3.0%

Q2 2014

Q3 2014

4.0% 3.0% 2.4%

2.6%

2.6%

2.0%

3.0% 2.2%

2.3% 2.0%

1.0%

1.0%

0.0%

0.0%

-0.1%

-1.0% -2.0%

Q3 2014

4.0%

-1.0% -1.4% -1.9%

-1.9%

2.0% 1.5% 0.9%

0.9%

1.2%

1.3% 0.1%

-0.3%

-0.2%

-0.4%

-0.1%

-0.1%

-2.0%

-1.8%

-3.0%

-3.0% -3.2%

-4.0% Index

Split BBB

BB

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

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Split BB

B

CCC/Split CCC

-4.0% Index

Split BBB

BB

Split BB

B

CCC/Split CCC

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

High-Yield and Bank Loan Outlook | Q4 2014

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Macroeconomic Overview Risk markets settled into a sense of complacency as we entered the third quarter “Recent data on everything from

of 2014. Volatility in July hovered near historic lows across most asset classes,

hiring to housing tells us that the U.S.

from equities to fixed income to currency markets—a market climate reminiscent

economy is truly firing on all cylinders.

of the calm days during the summer 2007. Our Global Chief Investment Officer

While investors are enjoying this rather

Scott Minerd warned at the time that investors should not be lulled, and instead

benign risk environment, it is important to guard against complacency.”

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

should prepare for choppier days ahead. Federal Reserve Chair Janet Yellen echoed this concern, warning the U.S. Congress that low volatility and heightened investor complacency may be prompting excessive risk-taking.

As if reacting to the tolling bells, high-yield markets sold off in July, leading to volatility that would spread across risk assets throughout the quarter. High-yield corporate bonds posted a loss of 1.3 percent in July, the first monthly loss in 10 months, with spreads widening by 13 percent. Equities followed, with the S&P 500 dropping 4 percent between July 24 and Aug. 7, climbing to record levels in August, and falling again in September. As the quarter ended, the risk-off sentiment that overtook markets was clear as defensive sectors, mainly consumer staples and healthcare, outperformed more cyclical sectors such as consumer discretionary and energy.

Our outlook for the U.S. economy remains positive. Despite weakness in September, strong U.S. economic data justified the rebound to the S&P 500’s highs in August. Second-quarter gross domestic product was revised upward to 4.2 percent, led by business investment. Durable goods orders surged over the summer to set the largest one-month gain on record while consumer confidence continued to hit multi-year highs. With tailwinds for economic growth gathering, we could see a strong third-quarter GDP reading of approximately 3.2 percent.

While the 10-year Treasury yield retraced

Upward Move for U.S. Rates is Capped by Relative Value

in September, we believe rates have

200 bps

limited room to move higher and could move lower. With 10-year German Treasury spread over German bunds rose to the highest level since 1999.

This premium should continue to attract foreign capital and investors seeking yield in government and sovereign securities.

10-Year U.S. Treasury Spread Over 10-Year German Bund

bund yields only 0.95 percent, the U.S.

150 bps 100 bps 50 bps 0 bps -50 bps -100 bps -150 bps -200 bps 1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

Source: Bloomberg, Guggenheim Investments. Data as of Sept. 30, 2014.

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While the U.S. economy is set to move full steam ahead, international economic data remain weak. Euro zone economic confidence is falling as the entire region continues to battle below-target inflation. At the start of September, the European Central Bank cut interest rates and signaled its intent to launch a program to purchase asset-backed securities and covered bonds to stimulate the dismal economy. In Japan, retail sales fell month over month in August, while industrial production faltered. Economic data around the world confirms our view that central banks are likely to renew efforts to force liquidity into the global financial system, which in turn further supports our positive outlook for risk assets.

However, positive returns are unlikely without volatility. Our research suggests that periods of complacency do not last, and those that take the longest to correct often experience the hardest fall. With fewer undervalued assets around today, the days of easy investing are behind us.

Third-Quarter Performance Recap Markets Hit Rough Waters Technical shifts in the high-yield bond market over the third quarter broke a 10-month streak of positive returns. High-yield bond mutual funds recorded net outflows of $3.9 billion, and spreads widened by 13 percent to 485 basis points from 398 basis points, adding fuel to the fire and spurring even more outflows.

In our view, the correction was both healthy and overdue. Since 2010, high-yield bond spreads have corrected by at least 10 percent every year and it typically takes about 20 weeks for the correction to occur. It was not until week 30 that we saw spreads widen by at least 10 percent this year. A number of events might have prompted a risk-off trade sooner—a first-quarter GDP revision to negative 2 percent, or the growing tension in Ukraine and Russia, for example—but investors failed to react to these events earlier in the year.

After rallying in August, the high-yield corporate bond market experienced some weakness in September ahead of the Federal Reserve Open Market Committee meeting. Speculation that the FOMC might strike a less accommodative tone by indicating a willingness to increase rates sooner than anticipated caused investment-grade and non-investment-grade corporate market spreads to widen by 13 percent and 10 percent, respectively.

The events that drove spread widening in the third quarter demonstrate that investors are becoming increasingly reactive to factors outside of the fundamentals that underscore our positive outlook on credit. We may see some additional volatility in October as the market speculates on the rate guidance language that will accompany the expected end to the Fed’s quantitative easing program, but we believe as the economy improves, these brief periods of spread widening should be viewed as buying opportunities.

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High-Yield and Bank Loan Outlook | Q4 2014

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High-yield-bond spreads have corrected

High-Yield Spread Corrections

by at least 10 percent every year since 2010. In fact, corrections typically occur

2014

much earlier in the year—about 20 weeks on average. This year, it took 30 weeks

2013

of complacency had briefly settled into the market.

Year

before high-yield spreads corrected by at least 10 percent, confirming that a period

30 22

2012

20

2010

22

2008

17 0

5

10 15 20 25 Number of Weeks Before 10% Spread Correction

30

35

Source: Credit Suisse, Guggenheim. Data as of Sept. 30, 2014. Spread corrections based on high-yield bond spreads widening by at least 10 percent versus the previous four-week low.

Unlike high-yield corporate bonds, the bank loan market has not been as affected by this year’s mutual fund outflows. Since April, net outflows from bank loan mutual funds totaled nearly $11 billion. As we mentioned in our previous report, this is a notable difference from the 95 consecutive weeks of inflows that bank loan funds recorded before April, but we believe this is a temporary reversal from individual investors. Offsetting mutual fund outflows is robust activity in the collateralized loan obligation market, which has raised $93 billion year to date, already exceeding 2013 full year volume and now on track to set a new annual record. Given strong demand from institutional investors, bank loans outperformed high-yield bonds over the third quarter by 160 basis points.

With fundamentals still intact we believe spreads can tighten from current levels.

However, upside potential is declining and there may still be some volatility ahead for credit. In effect, this means that investors are being compensated less today for withstanding volatility than they were in 2011, when spreads above the historic average had significant room to tighten. Investors should plan for choppier waters in this environment, and there are a number of strategies investors can implement to limit volatility and capture strong returns. One segment which we believe offers both is the middle market.

A Market that Continues to Favor Investors Why We Like the Middle-Market Segment While there is no standard definition of a middle-market company, market participants generally view them as small to midsize companies with earnings before interest, tax, depreciation and amortization of less than $50 million, or with sales volume ranging from $50 million to $1 billion. We also identify middle market based on debt or loan size of up to $750 million, and consider tranches between $300 million and $750 million as “upper middle market.”

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High-Yield and Bank Loan Outlook | Q4 2014

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The middle market plays an important role in the overall health of the U.S. economy. According to the National Center for the Middle Market, there are nearly 200,000 U.S. middle-market businesses that represent one-third of private sector GDP. These businesses added jobs across major industry sectors through the financial crisis between 2007 and 2010. Most are private companies, and only 40 percent have revenues from outside the United States. This segment includes many well-known names such as Ethan Allen, American Apparel, California Pizza Kitchen and Orbitz.

Middle-market companies have traditionally been underserved by traditional sources of capital. Their smaller size makes it less economical for banks to devote resources to perform the extensive due diligence required to underwrite debt, so middle markets lack the easy access to broadly syndicated capital markets that larger corporations often tap for financing. Instead, middle-market companies rely on business development companies, finance companies and institutional investors via CLOs and separately managed accounts. Unlike broadly syndicated loans, middle-market lenders typically retain greater control over covenants and deal terms, such as spread, yield and maturities. This means that the deterioration in investor protections we’ve seen for larger offerings occurs at a much slower pace within smaller loans. The Credit Suisse Leveraged Loan index shows that the presence of covenant-lite structures is less prominent in smaller loans than in larger loans.

The middle market’s reliance on a smaller

Leverage Loan Covenant Status By Size

group of lenders, rather than the broadly

Full Covenant

syndicated process undertaken for larger

100%

offerings, gives lenders the upper hand in

90%

smaller middle-market financings while

80%

underwriting standards and investor protections continue to deteriorate for

36% 53%

55%

47%

45%

$300 - $750 million

> $750 million

70%

larger loans. The presence of covenant-

60%

lite loans is one example: Only 36 percent

50%

of loans smaller than $300 million are

40%

covenant lite.

30%

Covenant Lite

64%

20% 10% 0%

< $300 million

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

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High-Yield and Bank Loan Outlook | Q4 2014

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The ability for lenders to limit the deterioration of middle-market debt terms and covenants is reflected in the default and recovery history. For the length of the last cycleâ&#x20AC;&#x2122;s bull market, from 2003 to 2007, there were no middle-market loan defaults according to S&P LCD data, while defaults for large corporate loans averaged 1.9 percent. Since 1999, average default rates for middle-market loans are one basis point lower than for larger corporate loans.

As the chart below shows, middle-market loans experience higher default rates during downturns. There are two drivers behind this phenomenon. The first are stricter covenants that middle-market companies are required to maintain. This can trigger technical defaults as the economy slows, causing EBITDA to decline, leverage calculations to rise above permissible levels and coverage ratios to fall below certain thresholds. These defaults are driven by covenant violations rather than from a missed interest or principal payment. As the economy decelerates further, the decline in coverage ratios has a true impact on the borrowerâ&#x20AC;&#x2122;s ability to service debt.

The combination of both events results in higher default rates for smaller companies during recessions than for larger companies. In the event of defaults, recovery rates then become an important assessment of quality and risk. According to S&P Capital IQ, the average middle-market loan recovery rate was 86 percent between 1989 and 2009, compared to 81 percent recovery for large-cap loans. Following the financial crisis, the average middle-market loan recovery rate between 2010 and 2014 was 81 percent, compared to 74 percent for larger corporate loans.

Over the past 15 years, middle-market

Default Rate Is Comparable

default rates average 3.2 percent, similar to the 3.3 percent defaults for

25%

large corporate loans.

Large Corporate Loans

Default Rate

20%

High Low Average Last

Middle-Market Loans

10.84% 0.12% 3.28% 3.95%

20.83% 0.00% 3.21% 0.00%

15%

10%

5%

0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

2011

2012 2013 2014

Source: S&P LCD. Data as of Sept. 30, 2014.

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High-Yield and Bank Loan Outlook | Q4 2014

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Investment Implications Less Volatility and Higher Premiums Given smaller debt sizes, middle-market debt is considered illiquid and often carries liquidity premiums to compensate investors, but we think there is more to the story. Our own experience suggests that middle-market loan liquidity is comparable to that of larger corporate loans, particularly in todayâ&#x20AC;&#x2122;s environment. In addition to a liquidity profile comparable to larger corporate loans, middle-market debt also enjoys a stable buy-and-hold investor base, which includes natural buyers such as middle-market CLOs and business development companies, both of which have lending platforms dedicated to the middle-market segment. Both have grown in number dramatically since 2008: middle-market CLOs total approximately $23 billion today, up from about $10 billion in 2009, while the market capitalization for BDCs now exceeds $33 billion, up from just $7 billion in 2009. Proposed legislation may also ease leverage limitations for BDCs, allowing them to double their debt-toequity ratio (the amount of debt for every $1 of assets) from 1.0x to 2.0x, translating into higher demand from already existing BDCs. With a stable investor base and a liquidity profile comparable to large loans, as well as a comparable default history, the yield and spread premiums generated in the middle-market segment appear very attractive from an investment standpoint.

Investors can pick up as much as 100 basis points of additional yield on smaller debt, on average, over similarly rated larger debt. This additional yield has historically served to boost returns and limit volatility. For example, high-yield corporate bonds with less than $750 million face value recorded an annualized total return of 7.3 percent since 1997 on averageâ&#x20AC;&#x201D;outperforming bonds with $750 million or more outstanding by 58 basis points on an annualized basis with 40 percent less volatility. We saw the same outperformance during the third quarter of 2014, when high-yield bonds with less than $750 million face value lost only 1.4 percent, on average, compared to 2.3 percent loss for larger bonds.

Higher liquidity premiums offer certain

Attractive Risk/Return Dynamics

benefits that disciplined investors may

Annualized Return

find valuable. Additional yield boosts

16%

returns and helps cushion portfolios from

14%

volatility in the short term and long term, translating into better absolute and riskadjusted returns.

Annualized Volatility 14.4%

12% 10% 8%

8.7% 7.3%

6.7%

6% 4% 2% 0%

High-Yield Bonds, $750 MM or Less Outstanding

High-Yield Bonds, $750 MM or More Outstanding

Source: Bank of America Merrill Lynch, Guggenheim. Data as of Sept. 30, 2014.

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High-Yield and Bank Loan Outlook | Q4 2014

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The opportunity to generate value in middle-market lending continues to grow. More stringent Basel capital requirements and recently revised leveraged lending guidelines have forced banks to almost entirely withdraw as middlemarket lenders. Through the first half of 2014, institutional investors and finance companies accounted for a combined 87 percent share of primary market loans, the most on record, while domestic banksâ&#x20AC;&#x2122; share of primary middle-market loans was only 3 percent.

Robust CLO activity and the limitations set by leveraged lending guidelines have caused banks to lose nearly all of their share of newly originated loans.

From 1997 through September 2014, institutional investors and finance companies have accounted for a combined 85 percent share of primary market loans, the most on record, according to S&P LCD.

Primary Market for Middle-Market Leveraged Loans Lenders: Primary Market for Middle-Market Leveraged Loans 2002

2007

2009

2014 YTD

Domestic Banks

52%

7%

26%

5%

Finance Companies

25%

13%

35%

8%

Foreign Banks

17%

7%

6%

8%

Institutional Investors

3%

67%

30%

77%

Securities Firms

4%

6%

3%

2%

Source: S&P LCD, Data as of Sept. 30, 2014.

Investors able to access middle-market debt through experienced, skilled managers should consider incorporating middle-market debt into the below-investmentgrade portion of their fixed-income strategies. Having historically delivered better annualized returns than large corporate bonds and bank loans, while also enjoying lower volatility, higher recoveries, and a comparable default history, we believe the yield premiums in the middle-market segment compensate for the potential of lower liquidity in a downturn. Between 2004 and 2013, our U.S. Bank Loan Composite* has been overweight middle-market debt (based on issue size of less than $300 million) by 27 percent compared to the Credit Suisse Leveraged Loan Index. As we seek to generate lower credit losses and attractive returns over time, middle-market debt represents an area that we find particularly compelling, and we believe the segment has the opportunity to continue to generate attractive returns for our investors while reducing the volatility for the choppy markets ahead. *The US Bank Loans Composite is comprised of accounts that predominantly invest in U.S.-based corporate bank loans.

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High-Yield and Bank Loan Outlook | Q4 2014

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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.

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.

The BofA Merrill Lynch US High Yield Index tracks the performance of US dollar denominated below investment grade corporate debt publicly issued in the US domestic market. Qualifying securities must have a below investment grade rating (based on an average of Moody’s, S&P and Fitch), at least 18 months to final maturity at the time of issuance, at least one year remaining term to final maturity as of the rebalancing date, a fixed coupon schedule and a minimum amount outstanding of $100 million.

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.

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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.

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.

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2

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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 more than $186 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

Chicago

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

227 W Monroe Street

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

Chicago, IL 60606

understand market trends and identify undervalued opportunities in areas that are

312 827 0100

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

Santa Monica

long-term results.

100 Wilshire Boulevard Santa Monica, CA 90401 310 576 1270

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

London

$210 billion2 in assets under management. Across our three primary businesses of

5th Floor, The Peak

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

5 Wilton Road

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

London, SW1V 1LG +44 20 3059 6600

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.

GPIM14934 GI-FLO - 10/14 x 10/15 #14934 Guggenheim Investments

High-Yield and Bank Loan Outlook | Q4 2014

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