Guggenheim Investments warns that factors that have contributed to strong earnings growth this year will fade in 2019 and turn into headwinds in 2020, leaving heavily leveraged corporate borrowers dangerously exposed.
NEW YORK – Guggenheim Investments, the global asset management and investment advisory business of Guggenheim Partners, today provided its Fourth Quarter 2018 High-Yield and Bank Loan Outlook.
Among the highlights in the 12-page report:
- With the Federal Reserve now targeting 2.00–2.25 percent on fed funds and more hikes on the way, tightening monetary policy is putting increasing pressure on corporate borrowers’ balance sheets across the leveraged credit landscape
- Strong earnings growth is masking the rising cost of debt. With earnings expected to peak this year while the Fed forges ahead into restrictive territory, we expect that now is as good as it gets for interest coverage.
- The cost of debt has been rising for almost every subset of the leveraged credit market, however we estimate that only 30–50 percent of the increase in short-term borrowing costs to date has passed through to the cost of debt for leveraged credit. We expect this passthrough to increase over the next 12 months as the Fed raises rates.
- Strong earnings growth, healthy interest coverage, and easy access to financing leads us to expect default volume will remain low over the next 12 months, but the tide will start to turn in 2019.
- Credit spreads tend to widen a year in advance of a recession, based on our analysis of the past three cycles. Now is the time to take advantage of exuberant markets to move up in quality and position for the recession in early 2020.
For more information, please visit www.guggenheiminvestments.com.
About Guggenheim Investments
Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners, with more than $208 billion¹ in 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-worth investors. Our 300+ investment professionals perform rigorous research to understand market trends and identify undervalued opportunities in areas that are often complex and underfollowed. This approach to investment management has enabled us to deliver innovative strategies providing diversification opportunities and attractive long-term results.
1Guggenheim Investments total asset figure is as of 6.30.2018. The assets include leverage of $11.7bn for assets under management. Guggenheim Investments represents the following affiliated investment management businesses of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Real Estate, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, and Guggenheim Partners India Management.
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