Citi Global Wealth PUTTiNG YoUr CASH To worK iN A HiGHer rATe eNviroNMeNT | | 46 Investments While painful for traditional investors, we believe FiGUre 1. ProPorTioN oF HiGH-YieLD BoND AND LoAN MArKeTS iN DiSTreSS fixed income market turmoil in 2022 has created a favorable landscape for alternative managers going into 2023. Specifically, we see potential Bond default rate Loan default rate opportunities to take advantage of volatility, Bond forecast Loan forecast capital shortages and episodes of outright stress 18% and/or distress. Specialist managers will use 16 their expertise in underwriting new issues and pursuing event-driven strategies in both public and private credit markets. 14 Lately, the universe of debt trading at stressed and/or distressed levels has expanded – te12 FIGURE 1. This is a result of tighter central t ra l bank policy, restrictions on the deployment of u 10 bank capital, higher bond yields and widening fa credit spreads – the latter owing to recessionary de o 8 fears. We see this bond selloff as broadly m indiscriminate, with investors overlooking firm- 2 1 specific factors that may influence when and g n i 6 l how borrowers repay their outstanding debt. i a As a result, we believe that managers who have r T insight into issuer quality and potential capital 4 structure events – including refinancings, debt exchanges and outright restructurings – may be 2 able to generate strong total returns. Spooked by this shakeout and the uncertain 0 outlook for corporate profits, certain capital markets have largely closed to some companies wishing to raise capital. Issuance of high-yield 1/01 3/03 5/05 7/07 9/09 11/11 1/14 3/16 5/18 7/20 8/21 9/22 bonds and loans through the end of the third quarter of 2022 stood at just 78% and 61% below levels respectively in the same period Source: Citi Research, Citi Leveraged Loan Tracker, FTSE, as of 30 Sep 2022. All forecasts are expressions of opinion, are subject to change without in 2021 – FIGURE 2. Given such severe debt- 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 issuance constraints, many companies may need for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or to explore alternative ways of raising capital. sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. See Glossary for definitions. Chart shows the percentage of US high-yield loans and bonds in distress. Distress is defined here as a bond trading below $60 and a loan trading below $80, where par is $100.