Seeking Fundamental Strength Amid Technical Weakness

Despite a weak near-term technical backdrop, certain bank loans remain supported by strong earnings and low default risk.

May 24, 2016

This sector report is excerpted from the Second Quarter 2016 Fixed-Income Outlook.

The year kicked off much as it left 2015, with significant bifurcation between the “haves” and “have-nots” in the bank loan market. Borrowers outside of commodity sectors and those with stable fundamentals (“haves”) continued to deliver solid performance, while commodity sectors and certain highly levered credits (“have-nots”) that have been struggling to meet interest payments performed poorly. More generally, bank loans have also been contending with a weakening technical backdrop in 2016, with CLO issuance totaling only $5.4 billion in Q1 2016 versus $31 billion in Q1 2015. At the same time, mutual fund outflows totaled $7.8 billion for the quarter, bringing net visible flows to -$2.4 billion for Q1 2016. Newly issued institutional loan volumes are down 31 percent on a year-over-year basis through Q1 2016, which has helped offset weak demand.

Lower Quality Outperformed Higher Quality Following Swift Rebound

Following 10 months of CCCrated loans and distressed loans underperforming BB-rated and B-rated loans, the trend was broken in March with CCC-loans and distressed loans (those rated CC and below or in default) recording their best monthly gain since January 2012 and January 2014, respectively.

Lower Quality Outperformed Higher Quality Following Swift Rebound

Source: Credit Suisse. Data as of 3.31.2016.

Against this weak technical backdrop and risk aversion at the start of the year, the Credit Suisse Leveraged Loan index posted a modest first-quarter gain of 1.3 percent with discount margins tightening by 22 basis points. Higher-quality bonds outperformed lower-quality bonds, but as the chart above shows, there was a dramatic shift during the quarter: March saw CCC-rated loans outperform BB-rated and B-rated loans, breaking a 10-month streak of underperformance. Even distressed loans, which include CC-rated, C-rated, and defaulted loans, returned 7 percent for the month, their strongest performance since January 2014.

Fundamentally, the loan market continues to perform well. Year-over-year earnings growth has been strong this cycle, averaging 11 percent since 2010 and exceeding nominal GDP growth every quarter. This suggests that the loan market has some cushion even if GDP growth slows. As our macroeconomic team believes that GDP growth will continue, aided by a strong consumer, we find attractive relative value opportunities in the new issue as well as the secondary market, particularly in sectors related to the consumer. These include technology, media, services, and select names in retail that have been unfairly punished as a result of a few problem children.

Leveraged Loan Market Earnings Growth Outpacing Nominal GDP

Loan market earnings growth remains healthy, with earnings before interest, taxes, depreciation, and amortization (EBITDA) growing at 7 percent on a year-over-year basis in Q4 2015, and 9 percent if oil and gas companies are excluded. Loan market earnings growth has been consistently stronger than nominal GDP growth in the current cycle, giving the loan market some cushion if U.S. economic growth slows.

Leveraged Loan Market Earnings Growth Outpacing Nominal GDP

Source: S&P LCD, Bloomberg, Guggenheim Investments. Data as of 3.31.2016.

—Thomas Hauser, Managing Director

Important Notices and Disclosures

This article is distributed for informational purposes only and should not be considered as investing advice or a recommendation of any particular security, strategy or investment product. It contains opinions of the authors but not necessarily those of Guggenheim Partners or its subsidiaries. The authors’ opinions are subject to change without notice. Information contained herein has been obtained from sources believed to be reliable, but are not assured as to accuracy. Past performance is no guarantee of future results.

Investing involves risk. In general, the value of fixed-income securities fall when interest rates rise. High-yield securities present more liquidity and credit risk than investment-grade bonds and may be subject to greater volatility. Asset-backed securities, including mortgage-backed securities, may have structures that make their reaction to interest rates and other factors difficult to predict, making their prices volatile and they are subject to liquidity risk. Investments in floating-rate senior-secured syndicated bank loans and other floating-rate securities involve special types of risks, including credit risk, interest-rate risk, liquidity risk and prepayment risk.

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, Transparent Value Advisors, LLC, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited and Guggenheim Partners India Management.


Jogging to the Exits - Featured Perspectives
November 19, 2018

Jogging to the Exits

Preparing for the market turbulence that typically occurs in the run up to a recession.

Forecasting the Next Recession: The Yield Curve Doesn’t Lie - Featured Perspectives
October 29, 2018

Forecasting the Next Recession: The Yield Curve Doesn’t Lie

Our Recession Probability Model and Recession Dashboard continue to suggest a recession is likely to begin in early 2020. Investors ignore the yield curve’s signal at their peril.

Beneath the Tide of Rising Earnings - Featured Perspectives
October 15, 2018

Beneath the Tide of Rising Earnings

Factors that have contributed to strong earnings growth this year will fade in 2019 and turn into headwinds in 2020, exposing leveraged corporate borrowers.


Forecasting the Next Recession 

Forecasting the Next Recession

Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”

Macro Themes to Watch in 2018 

Macro Themes to Watch in 2018

In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”

© 2018 Guggenheim Partners, LLC. All rights reserved. Guggenheim, Guggenheim Partners and Innovative Solutions. Enduring Values. are registered trademarks of Guggenheim Capital, LLC.