Guggenheim Investments. European High-Yield and Bank Loan Market Overview

Transcription

1 Guggenheim Investments European High-Yield and Bank Loan Market Overview August 2015

2 European High-Yield & Bank Loan Market Overview Please see disclosures and legal notice at end of document. 2

3 August 2015 European High-Yield Bond Market Recap The Credit Suisse Western European High-Yield Bond Index lost 1.04 percent on a total return August European high-yield bonds (hedged to the Euro), outperformed the U.S. high-yield bond market by 0.73 percent. Western European high-yield bond new issuance was extremely light at 0.6 billion in August 2015, the lowest since September The 12-month trailing default rate for Western European high-yield bonds increased 13 basis points to 0.87 percent. BENCHMARK INDICES Spread YTW Spread YTW Spread YTW Credit Suisse Western European HY Index 12/31/2014 7/31/2015 8/31/ % % % BB % % % B % % % CCC/Split CCC % % % Not Rated % % % Historical CS Western European HY Index Spread / YTW CS Western European HY Index Spread / YTW (1-Year View) 2000bps 1800bps 1600bps 1400bps All Spread (LHS) YTW (RHS) High: 1, % Low : % Average: % Last: % 22.50% 20.00% 17.50% 15.00% 540bps 500bps 1-Year Spread (LHS) YTW (RHS) High: % Low : % Average: % Last: % 6.00% 5.50% 1200bps 1000bps 800bps 12.50% 10.00% 7.50% 460bps 420bps 5.00% 600bps 400bps 5.00% 2.50% 380bps 4.50% 200bps % 340bps 4.00% Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Source: Credit Suisse. Data as of Please see disclosures and legal notice at end of document. 3

4 August 2015 European Bank Loan Market Recap The Credit Suisse Western European Leveraged Loan Index lost 0.17 percent in August The average discount margin ( DMM ) to maturity widened by 7 basis points to 515 basis points. Western European leveraged loans outperformed U.S. leveraged loans by 0.48 percent. Western European institutional loan issuance was 6.4 billion in August 2015, bringing year-to-date issuance to 56.4 billion. The 12-month trailing default rate for Western European institutional loans decreased 2 basis points to 1.91 percent. BENCHMARK INDICES DMM Price DMM Price DMM Price Credit Suisse Western European LL Index 12/31/2014 7/31/2015 8/31/ $ $ $97.25 BB 394 $ $ $99.39 B 571 $ $ $97.15 CCC/Split CCC 961 $ $ $95.02 Not Rated 597 $ $ $96.82 Historical CS Western European LL Index Discount Margin / Price CS Western European LL Index Discount Margin / Price (1-Year View) 2000bps 1800bps 1600bps 1400bps 1200bps 1000bps 800bps 600bps 400bps 200bps All DMM (LHS) Price (RHS) High: 1, Low : Average: Last: bps 570bps 550bps 530bps 510bps 490bps 470bps 1-Year DMM (LHS) Price (RHS) High: Low : Average: Last: bps 98 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug Source: Credit Suisse. Data as of Bank loan issuance excludes non-institutional loans. Please see disclosures and legal notice at end of document. 4

5 Leveraged Credit Monthly and Year-to-Date Performance Credit Suisse Western European High-Yield Index Monthly and YTD Performance 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% -2.0% 5.8% 4.9% 4.9% 4.3% 4.4% 4.3% 4.0% 3.7% 2.9% 3.0% 3.2% 2.5% 2.12% 2.1% 0.9% 0.5% 0.8% 0.8% 0.70% 0.68% 0.0% 0.06% 0.31% -0.4% -0.6% -1.04% -1.4% -1.47% Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Monthly High Yield Bond Index Return (hedged to EUR) YTD High Yield Bond Index Return Credit Suisse Western European Leveraged Loan Index Monthly and YTD Performance 6.0% 5.0% 4.0% 3.0% 2.0% 1.0% 0.0% -1.0% 3.9% 3.6% 3.7% 3.4% 3.1% 2.1% 2.3% 2.2% 2.2% 2.6% 2.0% 2.2% 1.5% 1.1% 0.73% 0.88% 0.2% 0.4% 0.4% 0.4% 0.1% 0.0% 0.50% 0.50% -0.1% -0.6% -0.23% -0.17% Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Monthly Lev Loan Index Return YTD Lev Loan Index Return Source: Credit Suisse. Data as of Based on Credit Suisse Indexes that include all denominations. Returns are hedged to the Euro. Please see disclosures and legal notice at end of document. 5

6 Bank Loan Discount Margins Continue to Trade Wide of Historical Average Credit Suisse Western European Leveraged Loan Index Discount Margin vs. Pre-Crisis Average 2000 bps 1800 bps 1600 bps Bank Loan Discount Margins (bps) High: 1,973 Low: 203 Pre-Crisis Average: 321 Last: bps 1200 bps 1000 bps 08/31/2015 Bank loans trade 194 bps above average 800 bps 600 bps 400 bps 200 bps Pre-Crisis Avg: 321 bps 0 bps Source: Credit Suisse. Data as of Please see disclosures and legal notice at end of document. 6

7 European Bank Loans Currently Offer Better Value than European High-Yield Bonds Difference Between European Bank Loan Discount Margins and European High-Yield Bonds 400 bps 200 bps Bank Loan Discount Margin High-Yield Bond Spreads High 272 Low -761 Pre-Crisis Average: -296 Last 15 0 bps -200 bps Pre-Crisis Avg: -296 basis points -400 bps -600 bps -800 bps bps Source: Credit Suisse. Data as of Please see disclosures and legal notice at end of document. 7

8 European Bank Loans Currently Offer Better Value than Similarly-Rated European High-Yield Bonds (BB-Rated) Difference Between European BB Bank Loan Discount Margins and European BB Bond Spreads 800 bps BB Loans - BB Bonds 600 bps High 583 Low -412 Pre-Crisis Average -84 Last bps 200 bps Higher risk premium in BB loans than in BB bonds 0 bps -200 bps Pre-Crisis Avg: -84 basis points -400 bps -600 bps Source: Credit Suisse. Data as of Please see disclosures and legal notice at end of document. 8

9 Relative Value Relationship Between Single-B European Bonds and Bank Loans Is Normalizing Difference Between European B Bank Loan Discount Margins and European B Bond Spreads 1000 bps 800 bps 600 bps B Loans - B Bonds High 836 Low -693 Pre-Crisis Avg -140 Last bps 200 bps 0 bps -200 bps Pre-Crisis Avg: -140 basis points -400 bps -600 bps -800 bps Source: Credit Suisse. Data as of Please see disclosures and legal notice at end of document. 9

10 Western European Leveraged Credit Annual Returns Western European Leveraged Credit Returns Historical View 80% 70% 60% 47% 40% 30% 24% 20% 0% 12% 13% 7% 11% 7% 5% 6% 2% 1% 15% 9% -1% -1% 10% 9% 9% 5% 2% 2% 4% -20% -40% -30% -32% YTD Credit Suisse Western European High Yield Index Credit Suisse Western European Leveraged Loan Index Source: Credit Suisse. Data as of Please see disclosures and legal notice at end of document. 10

11 Market Trends Please see disclosures and legal notice at end of document. 11

12 United States and European High-Yield Market Size Over Time Market Size of U.S. High-Yield Bond Market and European High-Yield Bond Market 400 $1,400 $1,200 1, , , , $1, $800 $ $ $ $ YTD U.S. Corporate High Yield (USD) Pan-European High Yield Market Value (EUR) 0 Source: Barclays, Guggenheim Investments. Data as of Based on Barclays Pan-European High-Yield Market Value (EUR) and Barclays U.S. Corporate High-Yield (USD) Indices. Please see disclosures and legal notice at end of document. 12

13 Default Rates and Recovery Rates Moody s expects the European speculative grade default rate to increase to 2.2 percent over the next 12 months; U.S. speculative grade default rate is expected to increase to 2.7 percent, on average, over the same period. The 12-month trailing average default rate for European high-yield bonds is 1.0 percent, compared to 2.0 percent for U.S. high yield. Between 1985 and 2014, bond and loan recovery rates in Europe were comparable to those in North America. Moody s Corporate Default Rates, January 2000 December 2014 Moody s Corporate Issuer-weighted Avg. Recovery rates, % 16% 14% 12% 10% 8% 6% 4% 2% 0% Default Rates US European High 14.8% 17.1% Low 1.1% 0.0% Average 5.0% 4.5% Last 1.9% 1.8% Europe North America First-Lien Loan 66% 67% Senior Unsecured Loan 51% 47% Senior Secured Bond 47% 53% Senior Unsecured Bond 35% 37% Senior Subordinated Bond 37% 31% Subordinated Bond 36% 31% Source: Moody s. Data as of Please see disclosures and legal notice at end of document. 13

14 Sharpe Ratio Combining High-Yield Bonds and Bank Loans Improves a Portfolio s Risk-Return Profile Leveraged credit investors would benefit from remaining diversified over the long-term. Demonstrating the benefits of diversification, an equally weighted portfolio of high-yield bonds and bank loans would have produced stronger risk-adjusted returns as reflected by a higher Sharpe ratio than a portfolio comprising 100 percent of high-yield bonds or bank loans over a five and 10-year period. 3, 5, and 10-Year Approximated Sharpe Ratios for European High-Yield Bonds, European Bank Loans, and Blended Portfolio Years 5 Years 10 Years 100% High Yield Portfolio 100% Leveraged Loan Portfolio 50% High Yield /50% Leveraged Loan Portfolio Source: Credit Suisse, Guggenheim Investments. Returns and standard deviations based on Credit Suisse Western European High-Yield Index and Credit Suisse Western European Leveraged Loan Index. Data as of Approximated Sharpe ratio is based on actual monthly returns and not excess returns, therefore it overstates the true Sharpe ratio. The calculation was intended for a comparison between high-yield bonds and bank loans only. Please see disclosures and legal notice at end of document. 14

15 European High-Yield Market Has a Higher Weighting to Secured Issuance 31 percent of the European high-yield corporate bond market, by amount outstanding, is secured. 19 percent of the U.S. high-yield corporate bond market, by amount outstanding, is secured. Europe United States 19% 31% 69% 81% Secured Unsecured Secured Unsecured Source: Barclays Pan-European and U.S. High-Yield Indices. Data as of Please see disclosures and legal notice at end of document. 15

16 Market Size Characteristics The U.S. high-yield market is approximately 3.6x bigger than the Pan-European high-yield market by amount outstanding The U.S. high-yield market is approximately 3.2x bigger than the Pan-European high-yield market by number of issues Excluding Financials: The U.S. high-yield market is approximately 4.2x bigger than the Pan-European high-yield market by amount outstanding The U.S. high-yield market is approximately 4.0x bigger than the Pan-European high-yield market by number of issues Barclays U.S. Corporate High Yield Barclays Pan European High Yield Barclays U.S. Corporate High Yield Ex. Financials Barclays Pan European High Yield ex Financials Number of Issues 2, , Liquid Issues (>$/ 500mm) % Liquid 42% 31% 39% 27% Amount Outstanding (EUR equiv.bn) Amount Outstanding (USD equiv.bn) Average Issue Size (EUR equiv, mm) Average Issue Size (USD equiv, mm) USD 100% 0% 100% 0% EUR 0% 75% 0% 76% GBP 0% 22% 0% 20% CHF 0% 3% 0% 4% SEK 0% 0% 0% 0% Secured Unsecured 1, Secured 19% 31% 20% 34% Unsecured 81% 69% 80% 66% Source: Barclays Pan-European and US High Yield Indices. Data as of The US index includes USD bonds issued by European companies and the European index includes European currency issuance (mainly Euro and Sterling). Please see disclosures and legal notice at end of document. 16

17 Disclosures and Legal Notice 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. This material is intended to inform you of services available through Guggenheim Investments affiliate businesses. The information presented herein has been prepared for informational purposes only and is not an offer to buy or sell, or a solicitation of an offer to buy or sell, any security or fund interest. Past performance is no guarantee of future results. The opinions, estimates, and investment strategies and views expressed in this document constitute the judgment of our investment strategists, based on current market conditions and are subject to change without notice. The investment strategies and views stated here may differ from those expressed for other purposes or in other contexts by other entities affiliated with Guggenheim Partners that may use different investment philosophies. Forward looking statements, estimates, and certain information contained herein are based upon proprietary and non-proprietary research and other sources. Although the information presented herein has been obtained from and is based upon sources Guggenheim Investments believes to be reliable, no representation or warranty, express or implied, is made as to the accuracy or completeness of that information. No representation or warranty is made by Guggenheim Investments or any of their related entities or affiliates as to the sufficiency, relevance, importance, appropriateness, completeness, or comprehensiveness of the market data, information or summaries contained herein for any specific purpose. The views and strategies described herein may not be suitable for all investors. This material is distributed with the understanding that it is not rendering accounting, legal or tax advice. Please consult your legal or tax advisor concerning such matters. In discussion of any strategy, results and risks are based solely on the hypothetical examples cited; actual results and risks will vary depending on specific circumstances. Investors are urged to consider carefully whether such services in general, as well as the products or strategies discussed in this material, are suitable to their needs. Barclays U.S. Corporate High Yield Index: The Barclays U.S. High Yield Index covers the universe of fixed rate, noninvestment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moodys, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-emg countries are included. Original issue zeroes, step-up coupon structures, 144-As and pay-in-kind bonds (PIKs, as of October 1, 2009) are also included. Barclays Pan European High Yield Index: The Barclays Pan-European High Yield Index covers the universe of fixedrate, sub-investment-grade debt denominated in euros or other European currencies (except Swiss francs). This index includes only euro-and sterling-denominated bonds, because no issues in the other European currencies now meet all the index requirements. To be included, the bonds must be rated high-yield (Ba1/BB+ or lower) by at least two of the following ratings agencies: Moody's, S&P, Fitch. If only two of the three agencies rate the security, the lower rating is used to determine index eligibility. If only one of the three agencies rates a security, the rating must be high-yield. Bonds must have at least one year to maturity and an outstanding par value of at least EUR50 million. The index does not include non-rated bonds, and it excludes debt from entities in countries that are designated as emerging markets. Barclays U.S. Corporate High Yield ex. Financials: subset of the Barclays U.S. Corporate High Yield Index, excluding Financial Issuers. Barclays Pan European High Yield ex. Financials: subset of the Barclays Pan European High Yield Index, excluding Financial Issuers. The information contained herein is given as of the date hereof and this does not purport to give information as of any other date. Neither the delivery of this document nor any sales made hereunder shall, under any circumstances, create an implication that there has been no change in the matters discussed herein since the date hereof Guggenheim Partners, LLC. All Rights Reserved. No part of this document may be reproduced, stored, or transmitted by any means without the express written consent of Guggenheim Partners, LLC. The information contained herein is confidential and may not be reproduced in whole or in part. Index and Other Definitions: Indices are unmanaged. The figures for the index reflect the reinvestment of dividends but do not reflect the deduction of fees or expenses which would reduce returns. Investors cannot invest directly in the indices. Credit Suisse Western European High Yield Index: The Credit Suisse Western European High Yield Index, All Denominations is designed to mirror the investible universe of the Western European high yield debt market, with issues denominated in $US, Euro and British Pounds. Credit Suisse Western European Leveraged Loan Index: The Credit Suisse Western European Leveraged Loan Index, All Denominations is designed to mirror the investible universe of the Western European leveraged loan market, with loans denominated in $US and Western European currencies. GPIM Please see disclosures and legal notice at end of document. 17