High Yield and Bank Loan Outlook - July 2016

July 2016

High-Yield and Bank Loan Outlook Focus on Recovery Rates as Credit Risk Rises Investment Professionals B. Scott Minerd Chairman of Investments and Global Chief Investment Officer

The rally in risk assets that began in February 2016 was interrupted in June by the United Kingdom’s vote to leave the European Union. Despite the selloff following the U.K. vote, high-yield bonds and bank loans still turned in impressive quarterly returns of 5.9 percent and 2.9 percent, respectively, bringing year-to-date returns to 9.3 percent and 4.2 percent. Current valuations in energy bonds indicate that

Jeffrey B. Abrams

leveraged credit has further room to rally as we pass the worst of the commodity-

Senior Managing Director,

related distress, but we continue to expect volatility will remain elevated until

Portfolio Manager Kevin H. Gundersen, CFA Senior Managing Director, Portfolio Manager Thomas J. Hauser Managing Director, Portfolio Manager

the fourth quarter.

Recent default experience, characterized by lower-than-average recovery rates in leveraged credit, may serve as a preview of the next default cycle. Our research suggests that high-yield bond recoveries should improve, but loan recoveries will remain depressed in light of weaker covenants and poor debt subordination. In this report, we review these trends and discuss our outlook for recoveries for high-yield bonds and bank loans.

Report Highlights

Maria M. Giraldo, CFA

The Credit Suisse High-Yield Bond and Leveraged Loan indexes posted gains

Vice President,

of 5.9 percent and 2.9 percent in the second quarter, their best quarterly

Investment Research

performance since the first and third quarters of 2012, respectively.

With global monetary policy growing more accommodative, foreign flows into the U.S. should have the effect of another round of quantitative easing to U.S. financial markets. Assets offering higher yields than U.S. Treasurys will continue to benefit from the persistent low-rate environment.

As yields fall, investors should more frequently evaluate loss and default assumptions. Our research suggests that high-yield bond recoveries should improve from the lower-than-average trend in 2015–2016 given the presence of more secured bonds in the market compared to the pre-crisis period. We expect leveraged loan recoveries will be lower in the next default cycle, but yields continue to compensate for credit risk.

Guggenheim Investments

High-Yield and Bank Loan Outlook | Q3 2016

1

Leveraged Credit Scorecard As of June 30, 2016 High-Yield Bonds December 2015 Spread Yield

April 2016 Spread Yield

May 2016 Spread Yield

June 2016 Spread Yield

Credit Suisse High-Yield Index

747

9.20%

668

7.93%

651

7.80%

674

7.73%

Split BBB

327

5.08%

297

4.27%

301

4.35%

311

4.18%

BB

462

6.38%

398

5.25%

395

5.27%

421

5.23%

Split BB

530

6.97%

472

5.89%

476

6.00%

501

5.96%

B

733

9.02%

613

7.31%

606

7.31%

632

7.27%

CCC / Split CCC

1,598

17.73%

1,407

15.50%

1,383

15.16%

1,406

15.03%

Bank Loans December 2015 DMM* Price

April 2016 DMM* Price

May 2016 DMM* Price

June 2016 DMM* Price

Credit Suisse Leveraged Loan Index

643

91.43

578

92.87

561

93.24

581

92.85

Split BBB

307

98.95

296

99.65

283

99.85

298

99.58

BB

420

97.32

356

99.28

347

99.48

371

98.97

Split BB

544

95.90

458

98.44

439

98.79

463

98.26

B

728

92.05

620

95.28

588

95.98

616

95.35

CCC / Split CCC

1,512

79.83

1,565

77.79

1,517

78.67

1,471

80.42

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 2016

14%

Q2 2016 12.6%

12%

12%

10%

10%

8%

8% 5.9%

6% 4%

4.8% 3.2%

2.6%

3.5%

3.7%

3.2% 3.3%

2.9%

3.1%

4% 2%

0%

0%

-2%

-2% Split BBB

BB

Split BB

B

CCC/Split CCC

Source: Credit Suisse. Data as of 6.30.2016. Past performance is not indicative of future results.

High-Yield and Bank Loan Outlook | Q3 2016

Q2 2016

8.8%

6% 4.2%

2%

Index

2

Q1 2016 14%

2.9% 1.3%

1.2% 1.1%

1.8% 1.6% 2.0% 1.9%

2.4% 1.6%

-0.7% Index

Split BBB

BB

Split BB

B

CCC/Split CCC

Source: Credit Suisse. Data as of 6.30.2016. Past performance is not indicative of future results.

Guggenheim Investments

Macroeconomic Overview Global yields have further to fall, but the long-term outlook for credit assets is positive.

Following two strong months for risk assets in April and May, June was marked “After the Brexit vote, we are seeing

by volatility. The month began with the nonfarm payrolls report showing only

rates in Japan and Europe continuing

38,000 U.S. jobs created in May versus an expectation of 162,000. The 10-year

to decline as we expected, and we

U.S. Treasury yield fell sharply from 1.8 percent to 1.7 percent on June 3 as markets

have rates in the United States under

significantly downgraded the probability of June and July rate hikes to just 4 percent

pressure to go lower. I believe that rates are going to continue to fall, which means that credit will do well.”

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

and 27 percent, respectively, down from 22 percent and 55 percent the day before.

The Federal Reserve (Fed) justified those diminished market expectations by declining to raise rates at its June meeting and bringing down median projections for the longer run fed funds rate from 3.2 percent in March 2016 to 3 percent.

Most FOMC participants continue to expect two or more hikes in 2016, but with inflation expectations troublingly low, and growth in Europe likely to slow, the Fed will be hard pressed to deliver two hikes in the balance of the year. Our view is that the path of Fed rate increases will be shallow, which will limit the upside in longerterm Treasury yields.

Following the June FOMC meeting, markets focused intently on the U.K.’s referendum on membership in the European Union (EU). Ultimately, the U.K. voted by a narrow margin to leave the EU. This event, which markets nicknamed “Brexit,” prompted panic selling of risk assets in Europe, the U.K., emerging markets, and in the United States. Spreads on U.S. high-yield corporate bonds widened by 76 basis points in the first week following Brexit, with the market giving back 1.8 percent of its gain for the quarter. Bank loan discount margins widened by 23 basis points over the same period as the market gave back 0.7 percent of its quarterly gain.

The quarter ended with the British pound at its weakest level against the U.S. dollar in over 20 years, while the quarter ended with German 10-year bunds yielding -0.12 percent, U.K. 10-year gilts yielding 0.95 percent, and the 10-year Treasury note yielding 1.47 percent, 30 basis points lower than the start of the quarter and closer to our target of 1.0 percent.

Nerves settled in the last two days of the quarter, and markets appeared to bounce back, but it is too early to gauge all of the unforeseen consequences of the Brexit vote. Global central banks attempted to calm markets by promising to do everything in their power to maintain market stability. The European Central Bank (ECB) is already considering loosening the rules of its quantitative easing (QE) program to ensure enough debt is available to buy.

Conventionally, declining sovereign yields do not coincide with rallying risk assets, but central bank purchases have distorted this relationship. As the ECB purchases more European sovereign debt, rates will keep declining, which should drive foreign investors deeper into U.S. markets in their search for yield. Foreign purchases of U.S. assets, particularly credit assets, will act essentially as another bout of QE for U.S. financial markets, moderating the Fed’s efforts to tighten

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High-Yield and Bank Loan Outlook | Q3 2016

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Sovereign yields declined further on the back of the U.K.’s vote to leave

Post-Brexit Flight to Safety Puts Pressure on Yields 10-Year U.S. Treasury Yield and 10-Year German Bund Yield

the EU as investors sought refuge from volatility. German 10-year bund

U.S. 10-Year Treasury Yields (LHS)

German 10-Year Bund Yields (RHS)

yields closed below zero in the second

2.5%

1.0%

2.4%

0.9%

quarter. U.S. 10-Year Treasury yields

2.3%

0.8%

also fell, ending the quarter at only 1.47

2.2%

0.7%

2.1%

0.6%

percent. We expect central bank buying of government debt will continue to push rates lower, with the 10-year U.S. Treasury note reaching 1.0 percent.

2.0%

0.5%

1.9%

0.4%

1.8%

0.3%

1.7%

0.2%

1.6%

0.1%

1.5%

0%

1.4%

-0.1%

1.3%

-0.2%

15 15 15 15 15 15 15 15 15 15 15 15 16 16 16 16 16 16 . 20 . 20 20 l 20 20 20 20 . 20 . 20 . 20 . 20 . 20 . 20 . 20 20 l 20 20 20 Jan Feb March Apri May June July Aug Sept Oct Nov Dec Jan Feb March Apri May June

Source: Guggenheim Investments, Bloomberg. Data as of 6.30.2016.

monetary policy. Though we are in a seasonally weak period for risk assets— a period that historically lasts until November—the easy stance of global monetary policy suggests that credit assets will perform well. We believe the rally in risk assets will remain intact through the third quarter of 2016, and monetary policy will ultimately create a positive backdrop for risk assets over the next two to three years.

Q2 2016 Leveraged Credit Performance Recap High-yield bonds and bank loans delivered strong performance despite headwinds.

Maintaining their first-quarter momentum, high-yield bonds kicked off the second quarter with strong performance in April, turning in their second best monthly return since October 2011 (exceeded only by March 2016’s equally impressive performance). Bank loans also delivered a strong April—their strongest month since March 2012. Both markets delivered positive returns in May, but lost steam in June on the back of Brexit-related concerns.

Despite Brexit weakness, leveraged credit markets ultimately delivered an impressive second-quarter performance, with high-yield bonds returning 5.9 percent, their best quarterly performance since the first quarter 2012, and bank loans returned 2.9 percent, their best quarterly performance since the third quarter of 2012. High-yield bond spreads tightened by 80 basis points to end June at 674 basis points, and the average three-year discount margin for leveraged loans tightened by 40 basis points, ending the quarter at 581 basis points.

An important driver of positive performance for the quarter was the rebound in commodity markets. Together, the energy and metals sectors in the Credit Suisse High-Yield Bond index delivered a total return of 12.6 percent in the second quarter,

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High-Yield and Bank Loan Outlook | Q3 2016

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half of 2016, high-yield energy bonds

High-Yield Bonds’ Below-Par Trade Shows Upside Potential Average High-Yield Bond Price by Broad Sector

continue to trade near 80 percent of par,

100%

Despite rebounding during the first

on average, while metals and minerals traded around 87 percent of par.

We believe we are passing the worst of the commodity-related distress, paving the way for strong credits to recover in price. Energy and metals currently offer the greatest total return upside in high yield versus the remainder of the highyield bond market which trades above 90 percent of par, on average.

97%

95% 90%

94%

Utility

Aerospace

91% 87%

85% 80%

94%

81%

75% 70% Energy

Metals / Minerals

Retail

Other*

Source: Guggenheim Investments, Credit Suisse. Data as of 6.30.2016. * “Other” includes services, transportation, financial services, consumer products, food and drug, manufacturing, media/telecom, information technology, chemicals, forest product/ containers, healthcare, gaming/ leisure, housing, and food/tobacco.

compared to a return of only 2.7 percent for the index excluding commodities.

Commodity-related loans in the Credit Suisse Leveraged Loan index returned 20 percent in the second quarter, but because the loan markets have only a 5 percent exposure to energy and metals, their combined contribution to total index return is much smaller. Non-commodity sectors in the bank loan market produced a total return of 2.2 percent over the quarter.

As we highlighted in our April 2016 report, investors typically price in defaults before they occur. High-yield energy bonds that defaulted between July 1, 2015, and June 30, 2016, traded at 33 percent of par, on average, at least one month prior to their ultimate default. As defaults slowly materialized, stronger credits recovered in price as the front-month West Texas Intermediate (WTI) oil futures contract rallied 31 percent from $38.34 per barrel at the end of the first quarter to $49.88 per barrel at the end of the second quarter.

According to Bank of America Merrill Lynch research, the 12-month trailing default rate in high-yield bonds issued by energy companies ended the second quarter at 23 percent, while the default rate for basic materials bonds ended the quarter at 7.6 percent. The default experience following the 1986–1987 and 1997–1998 oil bear markets indicate that we are now passing the worst in the energy default cycle.

With non-defaulted energy high-yield bonds still trading at only 81 percent of par on average, this sector currently presents some of the best opportunities over the next 12 months as oil prices recover.

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High-Yield and Bank Loan Outlook | Q3 2016

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U.S. high-yield corporate bond recovery rates plunged to only 29 percent on

Commodity Sector Pulls Down High-Yield Recovery Rates Recovery Rates for Defaulted High-Yield Bonds

average in the 12 months ending March 31, 2016. U.S. high-yield recovery rates have averaged 54 percent for the full cycle since 2010, suggesting that there is no post-crisis cyclical trend of lower recoveries in the high-yield market.

Average Recovery Rate

Six-Year Average Recovery Rate

Average Recovery Rate 1977–March 2016

70% 60%

Historical Average: 43%

50% 40% 30% 20% 10% 0% 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 Source: Guggenheim Investments, Credit Suisse. Data as of 3.31. 2016. Last bar reflects the 12-month period ending 3.31.2016.

Diving into Credit Loss Recovery Trends In the midst of the 2015–2016 commodity-market default cycle, below-average recovery rates emerged as a concerning trend. U.S. high-yield corporate bond recovery rates have averaged 43 percent since 1977, according to Credit Suisse data, but in the 12 months ending March 2016, average recovery rates for defaulted highyield corporate bonds plunged to only 29 percent—a level consistent with past recessions.

The decline in recent recovery rates has been driven by low recoveries among commodity-related defaults, where energy and basic materials produced average recovery rates of 33.4 percent and 28.8 percent over the same time period.

Outside of commodity sectors, recoveries averaged 46 percent in 2015, which is slightly higher than the historical average. Looking at the average for the full cycle since 2010, U.S. high-yield recovery rates have been 54 percent, which is higher than in any six-year period dating back to 1977. The six-year view suggests that there is no post-crisis cyclical trend of lower recoveries in the high-yield market.

As the above chart demonstrates, recovery rates appear stronger in the current cycle, with the exception of 2015 and the first quarter of 2016, which have been predominantly energy and commodity defaults. We believe stronger recovery rates are the result of a greater share of secured debt in the universe of high-yield corporate bonds. When leveraged credit primary markets reopened in 2009, highyield corporate bond issuance began through refinancings of senior secured bank loans into senior secured bonds. This trend has since continued, and has resulted in one of every four newly originated high-yield bonds carrying a secured status since 2009. Before the crisis, only 10 percent of high-yield bonds were secured.

According to Bank of America data, 17 percent of the high-yield market (based on number of bonds) were secured at the end of the second quarter, compared to the historical average of only 10 percent between 1996 and 2008.

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High-Yield and Bank Loan Outlook | Q3 2016

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Since 2009, one in every four newly issued high-yield bonds has been senior

High-Yield Market Becomes More Investor-Friendly Senior Secured High-Yield Bonds as a Share of New Issuance

secured, a favorable trend for high-yield investors. Before 2009, only one in every 10 newly issued bonds offered comparable security. A greater presence of secured bonds in the high-yield corporate bond market should have positive implications for recoveries in the future.

Senior Secured Debt, Share of New HY Issuance

1996–2008 Average

2009–2015 Average

40% 35% 2009–2015 Average: 25%

30% 25% 1996–2008 Average: 10%

20% 15% 10% 5% 0% 1986

1988

1990

1992

1994

1996

1998

2000 2002 2004 2006 2008 2010

2012

2014

Source: Guggenheim Investments, Credit Suisse. Data as of 12.31.2015.

A strong relationship exists between seniority level, secured status, and recovery rates. Claimants of defaulted first-lien bonds have historically recovered 58 percent of their value, versus only 44 percent and 38 percent for senior unsecured bonds and subordinated bonds. 2014 and 2015 recovery rates follow the same trend.

Given this clear relationship, the mix of bond issuance by seniority provides a fairly good approximation for future recovery rates. Our internal research suggests that given the share of secured issuance in 2015, recoveries in the high-yield corporate bond market will range between 43 percent and 51 percent over the next five to six years, an improvement from the below-average trend over the past 12 months.

High-Yield Recovery Rates by Seniority Senior Secured

Senior Unsecured

Senior Subordinated

Junior Subordinated

1980–2015 Average

58%

2010–2015 Average

64%

44%

38%

35%

43%

49%

48%

21%

54%

2015 Average Only

41%

36%

18%

63%

37%

Overall

Source: Guggenheim, Credit Suisse. Data as of 12.31.2015.

Recovery Rates Expected to Fall in the Loan Market The volume of commodity-related defaults in the loan market has been smaller than in the corporate bond market because of the sector’s limited exposure to energy names. Of the institutional loans that defaulted in 2015, recovery rates averaged 58 percent, lower than the average of 65 percent since 1995. Since 2010, recovery rates for institutional term loans have averaged only 55 percent, prompting market concerns that the next default cycle will result in even lower recoveries.

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High-Yield and Bank Loan Outlook | Q3 2016

7

leveraged loan market highlight

Post-Crisis Loan Recovery Rates Have Fallen Institutional Loan Recovery Rates per $100 Par

deteriorating protections for loan

100%

Post-crisis recovery rates in the

investors. Since 2010, recovery rates for institutional term loans have averaged only 55 percent, prompting market concerns that the next default cycle will result in even lower recoveries.

90% 76%

80%

76%

70% 55%

60% 50% 40% 1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: Guggenheim Investments, Credit Suisse. Data as of 3.31.2016.

Subordination plays an important role in evaluating potential recoveries in the loan space. Unfortunately, the percent of debt subordinated to newly issued first-lien loan tranches has declined from 41 percent in 2003 to 22 percent in 2015.

We reviewed the debt structure of 20 percent of the constituents in the Credit Suisse Leveraged Loan index and found that first-lien term loans have only 25 percent debt cushions, on average.

According to a Standard & Poor’s study of defaulted loans from 1998–2015, first-lien loans with a 0–25 percent cushion produced recoveries of slightly over 70 percent, while those with 25–50 percent subordination and 50 percent or more subordination saw recoveries average 73.5 percent and 80 percent, respectively. Given that first-lien term loan debt cushions have diminished since 2007, we believe recovery assumptions for defaulted loans should be adjusted down by at least 5 percent.

Deteriorating debt cushions do not fully explain why recovery rates have been a full 20 percentage points lower since 2010 compared to the prior two credit cycles. This appears to be the case in every year since 2010, which eliminates the commodity market stress as a likely explanation. We believe weak covenants are also contributing to below-average recovery rates.

While there is no single definition of a “covenant-lite” loan, the term typically refers to loans that do not contain some of the usual protective covenants for the benefit of the creditor. In particular, the absence of maintenance covenants, or those that require the borrower to maintain certain financial measures relating to income, cash flow, or interest coverage, is almost always a characteristic of a covenant-lite loan. Some noteworthy trends relating to covenant-lite loans:

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High-Yield and Bank Loan Outlook | Q3 2016

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loans is expected to be less beneficial

Subordinated Debt Levels Decline in Leveraged Capital Structures Average Debt Cushion of Newly Issued Leveraged Loans

to loan investors as there is less

45%

The senior secured status of leveraged

subordinated debt to absorb early losses compared to historical levels.

The percent of debt subordinated to

40%

newly issued first-lien loan tranches averaged only 24 percent between

1997–2007 Average: 33%

35%

2010 and 2015, compared to an average of 33 percent before 2007.

30% 2010–2015 Average: 24%

25%

20% 1 3 5 2 7 9 8 6 4 1 0 3 2 5 7 8 9 4 0 199 199 199 200 200 200 200 200 200 200 200 200 200 201 201 201 201 201 201

Source: Guggenheim Investments, Moody’s. Data as of 12.31.2015.

Between 2004 and 2006, covenant-lite loans represented only 4 percent of newly issued loans. In the first half of 2016, they represented 73 percent.

By the end of 2006, only 7 percent of the Credit Suisse Leveraged Loan index was covenant lite. Today, covenant-lite loans have become the standard, representing 64 percent of the Credit Suisse Leveraged Loan index.

In an apparent paradox, in the last cycle, covenant-lite loans produced higher recovery rates than full-covenant loans—92.5 percent according to S&P, versus 81 percent for defaulted loans with standard covenants. However, during the mid2000s covenant-lite loans were more typically granted to the most credit-worthy borrowers and those with a higher proportion of junior capital. Both factors contributed to higher recovery rates among defaulted covenant-lite loans in 2008 and 2009. The prevalence of the covenant-lite trend today suggests the same cannot be said in the current cycle. In fact, debt cushion for first-lien covenant-lite loans have also fallen, from 33 percent on average between 2005 and 2010, to an average of only 25 percent between 2011 and 2015.

In these conditions, we believe leveraged loan investors face potentially lower recoveries in the next downturn. Subordination will be a key determinant of recovery assumptions, while the covenant-lite trend and 2010–2015 recovery rates point to bank loan recovery expectations moving closer to the high-yield bond market. Therefore, a better recovery gauge for covenant-lite loans moving forward may be historical recoveries for first-lien bonds, which are structured similarly to covenant-lite loans. According to Moody’s, first-lien bonds recovered 53.4 percent on average between 1983 and 2015.

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High-Yield and Bank Loan Outlook | Q3 2016

9

Factoring in both of these prevailing trends, our estimate for bank loan recovery rates over the next five years is approximately 62 percent. We derive this conclusion from the average first-lien bond historical recovery rates (53 percent) and recovery rates of first-lien term loans with less than 25 percent debt cushion (71 percent).

This estimate is in line with the 2011–2015 average recovery rate for first-lien term loans of 63 percent.

Investment Implications Monitoring defaults and recoveries is critical in this environment.

Weak recovery trends that emerged from 2015 and 2016 defaults highlight the consequences of deteriorating investor protections and the potential impact to portfolios. This trend is likely to continue as investors trade off protection for yield. Monitoring defaults and recoveries, and adjusting portfolio expectations accordingly, is therefore critical in the current low rate environment and at this point in the credit cycle.

2016 Risk Adjusted Returns, Equities vs. Bonds and Loans S&P 500

HY Corporate Bonds

Leveraged Loans

IG Corporate Bonds

U.S. Treasurys

2016 YTD Return

3.84%

9.30%

4.23%

7.68%

5.37%

Annualized Volatility of Daily Returns, 2016 YTD

11.38%

4.62%

1.18%

2.91%

2.78%

2016 Return per 100 bps of Volatility

0.34%

2.02%

3.59%

2.64%

1.93%

In a diversified portfolio of high-yield bonds, recovery rates should improve due to the presence of more secured debt in 2016 compared to the era before 2009.

Considering our view that defaults will not spread beyond the commodity sectors, average bond yields of 7.7 percent in the Credit Suisse High-Yield Bond index continue to compensate for credit risk. As discussed earlier in this report, the commodity sector presents the most attractive opportunity on a relative value basis, but investors must carefully add to this sector as the oil market slowly recovers.

Leveraged loans have historically benefited from their senior secured status which contributed to low credit losses. Post-crisis trends suggest this benefit is diminishing without the traditional investor protections and debt cushions.

The market appears to have already adjusted expectations accordingly given that leveraged loan discount margins remain wide of historical averages. At average three-year yields of 6.5 percent, we believe leveraged loans also compensate for credit risk.

The benefit of an allocation to loans in 2016 is clear when compared to other asset classes. As the chart above shows, while loans are underperforming corporate bonds and Treasurys on a total return basis, they are leading the way on a riskadjusted basis in 2016. We believe that leveraged loans will produce strong riskadjusted returns over the next two to three years, particularly in a low default environment. Yields and spreads are unlikely to return to pre-crisis tights, however, as we expect loss rates to rise.

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High-Yield and Bank Loan Outlook | Q3 2016

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

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

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

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

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

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 Barclays U.S. Treasury Index measures U.S. dollar-denominated, fixed-rate, nominal debt issued by the U.S. Treasury.

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 03.31.2016. The assets include leverage of $11.4bn for assets under management and $0.5bn 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.

2# Guggenheim Partners’ assets under management are as of 03.31.2016 and include consulting services for clients whose assets are valued at approximately $56bn.

1#

©2016, 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. Guggenheim Funds Distributors, LLC is an affiliate of Guggenheim Partners, LLC and Guggenheim Investments. For information, call 800.345.7999 or 800.820.0888.

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Guggenheim Investments

High-Yield and Bank Loan Outlook | Q3 2016

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Guggenheim’s Investment Process Portfolio Construction

Our quarterly High-Yield and Bank Loan Outlook features insights from our Corporate Credit Sector team, one of four groups that comprise our unique investment management structure and process.

Macroeconomic Research

Client

Portfolio Management

The Guggenheim Investments (Guggenheim) process separates research, security selection, portfolio construction, and portfolio management functions into teams with specialized expertise. This structure is intended to avoid cognitive biases, snap judgments, and other decision-making pitfalls. It also provides a foundation for

Sector Teams

disciplined, systematic, and repeatable investment results that does not rely on one key individual or group. The people and the process are the same for institutional accounts and mutual funds. Our pursuit of compelling risk-adjusted return opportunities typically results in asset allocations that differ significantly from broadly followed benchmarks.

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About Guggenheim Investments Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with $199 billion1 in total assets across fixed income, equity, and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and public pension funds, sovereign wealth funds, endowments and foundations, consultants, wealth managers, and high-net-

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worth investors. Our 275+ investment professionals perform rigorous research to

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understand market trends and identify undervalued opportunities in areas that are

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often complex and underfollowed. This approach to investment management has

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enabled us to deliver innovative strategies providing diversification opportunities

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and attractive long-term results.

About Guggenheim Partners Guggenheim Partners is a global investment and advisory firm with more than $240 billion2 in assets under management. Across our three primary businesses

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

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

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

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

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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.