2013 Leveraged Credit Report: High Yield and Bank Loans
January 11, 2013
by Scott Minerd
of Guggenheim PartnersLearn more about this firm
Record high prices, historically low yields and gradually deteriorating fundamentals have tempered expectations for the leveraged credit market. Generating above-market returns in 2013 will require an even greater emphasis on fundamental credit analysis to unearth opportunities in attractively valued segments of the market, such as upper middle-market bank loans.
As we kick off 2013, there is a noticeably cautious tenor surrounding the leveraged credit market. Although 2012 saw impressive returns in the high yield bond and leveraged loan markets of 14.7 and 9.4 percent, respectively, few are expecting a repeat of this performance. Since December 2008, the high yield bond and leveraged loan markets have recorded annualized average returns of 22 and 14 percent, respectively, but record high prices, historically low yields, and gradually deteriorating fundamentals have tempered forward expectations with forecasts calling for single digit returns.
Muted optimism aside, the leveraged credit market remains the primary destination of choice for investors seeking yield in the fixed income market. Despite leverage stealthily ticking up towards post-recession highs and the return of increasingly aggressive deal structures, investors are seemingly willing to trade covenant protection for higher yields. While the demand for yield and accommodative monetary policy provide strong, technical undercurrents, generating above-market returns will require an even greater emphasis on fundamental credit analysis to unearth undervalued opportunities. We believe bank loans, particularly upper middle-market financings, offer attractive relative value going forward.
- Rebounding from a 1.8 percent return in 2011, bank loans gained 9.4 percent in 2012. High yield bonds returned 14.7 percent in 2012, compared to 5.5 percent in 2011.
- Nominally low yields throughout the fixed income universe drove capital into the leveraged credit sector, with issuers responding with record level supply. 2012 high yield bond issuance totaled $346 billion, the most ever, while the loan market enjoyed its highest level of issuance since 2007.
- Since 1992, the Credit Suisse Leveraged Loan Index, on average, has yielded 130 basis points less than the Credit Suisse High Yield Index. With bond yields finishing the year at 6.25 percent, the lowest level on record, this differential has narrowed to 30 basis points, increasing the relative value of bank loans.
- As default rates have stabilized below historical averages, investors have been willing to tolerate increased credit risk in exchange for incremental yield. During 2012, covenant-lite loans represented 33 percent of total bank loan issuance, three times the average of the previous four years.
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1) Guggenheim Partners’ assets under management figure is updated as of 09.30.2012 and includes consulting services for clients whose assets are valued at approximately $35 billion.
2) The total asset figure is as of 09/30/2012 and includes $9.56B of leverage for Assets Under Management and $0.83B of leverage for Serviced Assets. Total assets include assets from Security Investors, LLC, Guggenheim Partners Investment Management, LLC (“GPIM”, formerly known as Guggenheim Partners Asset Management, LLC; GPIM assets also include all assets from Guggenheim Investment Management, LLC which were transferred as of 06.30.2012), Guggenheim Funds Investment Advisors and its affiliated entities, and some business units including Guggenheim Real Estate, LLC, Guggenheim Aviation, GS GAMMA Advisors, LLC, Guggenheim Partners Europe Limited, Transparent Value Advisors, LLC, and Guggenheim Partners India Management. Values from some funds are based upon prior periods. 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. © 2013, Guggenheim Partners, LLC.