Analysis of the profitability of high-yield loans



An appropriately diversified loan portfolio should include both high yield corporate bonds and bank loans, given their comparable cost.

NEW YORK, Aug 31, 2021 (GLOBAL) – Guggenheim Investments, the global asset management and investment advisory firm Guggenheim Partners, today unveiled its Forecast for high yield and bank loans for the third quarter of 2021… The report, entitled “High Yield Loan Yield Analysis,” explains why now is a good time for investors to make a relative valuation of corporate bonds and bank loans.

Highlights of the 16-page report include:

  • Our credit spread dashboard shows that the discount margin on secondary loans is low compared to corporate bond spreads, due to differences in base rates as well as a higher risk of loan withdrawals.

  • Call risk significantly limits short-term upside potential. Investors may look to the primary market, where recall protection is the longest, and find that loan yields are comparable to corporate bond yields in the BB and B groups.

  • We expect high-yield companies to average annual credit losses of 110 basis points over the next three to five years, below the historical average of 261 basis points. For loans, we estimate an average annual credit loss rate of 86 basis points, which is lower than for legal entities due to the higher rate of return.

  • Our projections of credit loss rates result in positive loss-adjusted loan yields for most credit segments, but do not provide sufficient headroom for CCC-rated companies.

  • Focusing on cohorts rated BB and B is prudent given record low returns, and can help limit portfolio volatility in the event of a correction.

  • In the second quarter, US real gross domestic product (GDP) grew at an annualized rate of 6.6 percent. From now on, we expect sequential growth to slow down until 2022: the impact of a once-only reopening will begin to wane and the impact of fiscal stimulus will decrease, even if another spending package is expected soon. This natural slowdown as we reach the peak of growth can create problems if growth slows more than expected.

  • Inflation is also likely to fall, given that most of the recent growth has come from categories suffering from temporary supply chain disruptions.

  • In this environment, different segments of both high yield corporate bonds and bank loans offer unique opportunities, and a properly diversified loan portfolio should have risks for both asset classes given their comparable cost.

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About Guggenheim Investments

Guggenheim Investments is the global asset management and investment advisory division of Guggenheim Partners with over $ 255 billion in capital.1 in total assets with fixed income, equity and alternative strategies. We focus on the return and risk needs of insurance companies, corporate and government pension funds, sovereign wealth funds, endowments and funds, advisors, asset managers and wealthy investors. Over 275 of our investment professionals conduct rigorous research to understand market trends and uncover undervalued opportunities in areas that are often complex and underestimated. This approach to investment management has enabled us to develop innovative strategies that provide opportunities for diversification and attractive long-term results.

1. Assets under management of Guggenheim Investments as of June 30, 2021 include leverage of USD 16.3 billion. Guggenheim Investments represents the following investment management subsidiaries of Guggenheim Partners, LLC: Guggenheim Partners Investment Management, LLC, Security Investors, LLC, Guggenheim Funds Distributors, LLC, Guggenheim Funds Investment Advisors, LLC, Guggenheim Corporate Funding, LLC, Guggenheim Partners Europe Limited. Guggenheim Partners Fund Management (Europe) Limited, Guggenheim Partners Japan Limited, GS GAMMA Advisors, LLC and Guggenheim Partners India Management.

Investing carries risks, including possible loss of principal. The potential impacts of the COVID-19 outbreak are becoming more uncertain, difficult to assess and impossible to predict, and can lead to significant losses. Investments in fixed income instruments are subject to the risk of an increase in interest rates, which will lead to a decrease in their value. High-yield debt securities and unrated debt securities carry a higher risk of default than investment grade bonds and may be less liquid, which can increase volatility.

One basis point is 0.01 percent.

This material is distributed or provided for informational or educational purposes only and should not be construed as advice on any particular security, strategy or investment product, or as investment advice of any kind. This material is not provided in a fiduciary capacity, cannot be relied on in or in connection with investment decisions, and does not constitute an invitation to offer to buy or sell securities. The content contained herein is not intended and should not be construed as legal or tax advice and / or legal opinion. Always consult with a financial, tax and / or legal professional regarding your specific situation.

This material contains the views of the author, but not necessarily the views of Guggenheim Partners, LLC or its subsidiaries. The opinions contained in this document are subject to change without notice. Forward-looking statements, estimates and certain information contained in this document are based on our own and independent research and other sources. The information in this document has been obtained from sources believed to be reliable, but accuracy is not guaranteed. Past performance is not indicative of future performance. There are no representations or guarantees regarding the current accuracy and responsibility for decisions based on such information. No part of this material may be reproduced or referred to in any form without the written permission of Guggenheim Partners, LLC.

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Gerard Carney
Guggenheim Partners


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