Outlier companies with the widest differentials between the secured and the unsecured tranches are TRW at 2600 bps, Neiman Marcus at 1256 bps, and Huntsman at 1154 bps, while tightest are PanAmSat at 83 bps, Rock-Tenn at 91 bps and Vanguard Health at 99 bps. Some very curious names are Invista and Alliance Imaging, whose term loans trade wider than their bonds, presenting an immediate cap arb negative basis opportunity (loan - bond convergence trade).
A preliminary observation is that a very wide differential between the tranches indicates the increased probability that the fulcrum security is the secured (loan) vs the unsecured (bond) tranche in case of a restructuring/liquidation, and inversely for tight differentials.
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5 comments:
wonder if that bond-loan basis is executable...sounds like pretty off the run names...now that you are on to it definitely going to disappear.. =)
Okay, what does all that mean in plain english? Its it better to own corporate loans or corporate bonds?
Does it matter for the individual investor?
"Okay, what does all that mean in plain english? Its it better to own corporate loans or corporate bonds?"
Zero is saying there's an opportunity to go long bonds and short loans, on the theory that their prices/interest rates will converge.
I think he's saying
Sorry:
I think he's saying that wider spreads imply that in general, you'd want to be long loans, short bonds. Given that the average is skewed by a small number of very wide spreads, there are also cases where you'd want to consider being long bonds (see Vanguard Health) given that the bonds will likely be the fulcrum security in that cap structure.
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