Citi Global Wealth PUTTiNG YoUr CASH To worK iN A HiGHer rATe eNviroNMeNT | | 48 Investments Opportunistic and special FiGUre 3: HiSToriCAL AND ForeCAST HiGH-YieLD AND LoAN DeFAULT rATeS situation credit investing PORTION OF HIGH-YIELD AND LOAN MARKETS TRADING IN DISTRESS Some managers seek to take advantage of forced selling by debt holders. For example, 45% 18% certain mutual funds may experience investor outflows that leave them needing to raise capital, therefore selling debt at prices that 40 16 entice opportunistic capital from hedge funds or HY CCC private equity vehicles. 35 below $60 14 Also, some banks have lately been forced to sell loans they committed to make to private equity 30 12 managers. To clear this arranged debt off their balance sheets, such banks have had to offer substantial price discounts on quality debt that 25 10 would have previously been syndicated at or near par. 20 8 Loans These cases highlight the potential opportunity HY CCC below $60below $80 Loans below $80 to acquire good credits at distressed price levels. 15 6 For now, of course, default rates remain low. However, the impact of higher yields and slowing economic growth may well be rising default rates 10 4 over the next year – FIGURE 3. In 2020, the speed of the pandemic-induced market decline 5 2 and the central bank reaction led to a short-lived distressed cycle. This time, we believe it possible that corporate defaults stay elevated for longer. 0 0 If so, it would create an extended window for 1/12 1/13 1/14 1/15 1/16 1/17 1/18 1/19 1/20 1/21 1/22 specialist managers to take troubled companies through the restructuring process. Source: Citi Research, Moody, as of 30 Sep 2022. All forecasts are expressions of opinion, are subject to change without notice and are not intended to be a guarantee of future events. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. Chart shows the historical and forecast bond and loan default rates between Jan 2001 through Sep 2022, as represented by trailing 12-month default rate.