Loans Versus Bonds Relative Value: Week of July 16

The divergence in loan and bonds trends has picked up marginally, with the bond universe wider by 8 bps to 968 bps and loans tighter by 22 to 471 bps. Mostly noise in the subset of 30 companies, except for the traditional yoyo TRW whose bonds and loans both screamed tighter by 410 bps and 130 bps, respectively. Is there any fundamental reason for this? Of course not.



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Loans Versus Bonds Relative Value: Week of July 2

The loan/bond universe was virtually flat in the prior week, with the only major outlier being TRW on the bond side, and Compucom on the loan side. Both universes tightened marginally (-10 bps and -17bps for loans and bonds, respectively), most likely due to the impact of these two main outliers.





Source: LoanConnector Sphere: Related Content

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Loans Versus Bonds Relative Value: Week of June 25

As expected last week, the tide in credit is turning. The average loan was 5 bps wider, while toxic bonds, just like that scene in Indiana Jones and the Temple of Doom, are starting their descent back into hell, wider by 78 bps on average, and just 23 bps away from the critical 1,000 bps threshold (after being at 895 bps last week).

Also, to see what a schizophrenic yoyo game even credits have become compare the Neiman Marcus and TRW bond spreads (wider by about 500 and 850 bps, respectively). Compare the TRW action from the current week with that from May 28. Lunacy.

While everyone now knows that the equity market is a manipulated, East Setauket fat-fingered joke (Dow going vertical on more bad news today? enough already), seeing credits act as irrationally should bring many a tear to the eyes of any seasoned credit trader.



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Loans Versus Bonds Relative Value: Week of June 18

The toxic grabfest is ending. This is best seen by the inversion in the secured/unsecured classes. While the loan universe moved 9 bps tighter over last week, the slow HY bus is still trying to load up on those Neiman Marcus bonds, hoping to see this piece of paper get taken out at par. Here's a hint - it won't.

Also, something really odd is going on with Sealy where loans ripped over 500 bps wider, while bonds were unchanged. This is either i) a bad data point, ii) an indication that the credit market has totally lost it, or iii) Pershing Square V was a fund fully invested in Sealy Loans, collected 2/20 for investing all client's capital in hte mattress-maker's loans, blew up, had a $1 billion BWIC, and annihilated the loan trading levels. While iii would be fun, our money is on the first two.





To visualize the phenomenal run up in credit over the past 3 months, the charts below should demonstrate just how foolish some credit portfolio managers have become.



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Loans Versus Bonds Relative Value: Week of June 11

Bear capitulation is here, at least in credit: every single name is tighter week over week in both loans and bonds. If there is ever a more contrarian signal, please let us know what it is. For the first time since the fall, the universe of 30 high yield names trades inside of 1,000 bps. And yet, we are supposed to hit 18% in cumulative HY defaults by the end of 2009 according to S&P and, beginning today, the totally credibility free Moody's. Pure, unadulterated junk bubble.



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Loans Versus Bonds Relative Value: Week Of June 4

Total short capitulation: that's the best way to describe what happened in the loan/bond universe during the last week. The only bond that widened was that of Aeroflex. Continued tightening in retailers and auto names has gone on beyond stupid-pill levels and officially entered the bizarro twilight zone: TRW bonds tighter by 400 bps, with both Sealy and Neiman Marcus tighter by roughly 300 bps. Fixed income fund managers merely looking at what is not tighter than comparable Treasuries and buying it without regard for rating, underlying fundamentals or how much time a company has before it files for bankruptcy. As all bubbles, this one too will end very badly.





Source: Loan Connector Sphere: Related Content

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Loans Versus Bonds Relative Value: Week Of May 28

Not much action in comparable week over week bond/loan changes. Marginal tightening in both loans and bonds offset the reversal widening that was witnessed for the first time last week. Average universe loan and bond spreads were at 548 bps and 1,040 bps, compared to 554 bps and 1,117 bps in the prior week.



Week over week, moves were sporadic, with Aeroflex bonds widening the most (by 300 bps), while TRW screamed tighter by more than half to 845 bps, a level last seen long before 2 of the D-3 had been nationalized, let along bankrupt.

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Loans Versus Bonds Relative Value: Week Of May 21

The first tightening in both asset classes, as loans widened by 3 bps and bonds: by 12 bps. Third derivative? Continuing on the theme from the prior week, Neiman Marcus bonds continue widening and now the bonds have joined the party as well. The biggest bond widener last week was First Data, while the squeeze is likely extracting the last few drops of blood from Sealy shorts. Look for the inevitable pullback over the next few days.

Some bizarro world factoids: Aeroflex, Laureate and Pantry loans widened while bonds tightened.





Data from LoanConnector Sphere: Related Content

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Loans Versus Bonds Relative Value: Week Of May 14

The squeeze in credit continues, however now with a twist. While tightening was a dominant theme as it has been in the past 10 weeks, average loans tightened by 31 bps (from a much tighter average absolute spread), more than than double the absolute spread tightening in bonds, which tightened by "only" 16 bps. Also, as expected, the tightening in the recent heatseeked names ended, and Huntsman and Neiman Marcus bonds both blew out wider, reversing the trend from recent weeks, which was most acute in last week's data set. Curiously, the squeeze in TRW seems to be trying to compete with that in the Citi arb, as the bonds have tightened by approximately 1,600 bps from the beginning of April. The bankruptcies of GM and Chrysler it appears have no impact on this auto supplier at all.

At this rate, the credit market will soon be back to February levels where one could establish negative basis trades between loans and bonds (absent as the market has normalized over the past 2 months).





Data source: Loan Pricing Corporation Sphere: Related Content

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Loans Versus Bonds Relative Value: Week Of May 7

Heat seeking in both bonds and loans was the dominant theme, with the usual suspects continuing to rip. Comparing current levels on garbage credits like Neiman Marcus, Sealy and TRW with their spreads 3 months ago and one can only question the sanity of even the credit market. Unlike last week when there were just three Fox Two instances, targeted at Huntsman, Graham Packaging and Neiman Marcus, this past week's IR-signature tracking selection is broader and even junkier.

"Solid" names like Compucom, Huntsman, Neiman Marcus, Sealy and TRW continued their ripfest tighter in bond land, and in many instances, in loans as well, while Aeroflex loans where the best relative secured performer. The only bonds widening in the entire 30 name universe were those of Michael Foods, and Constellation Brands - obviously consumer staples have every right to be seen as the riskiest last week when the rolling squeeze among garbage credits was doing all it could to flatter the equity markets.



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Loans Versus Bonds Relative Value: Week Of April 30

Just when we thought the heat-seeking short squeeze in credit land may be subsiding, three new bonds rip tighter: old shorter max-pain name Neiman Marcus, whose bonds tightened by 540 bps, Graham Packaging which ripped by 550 bps and Huntsman Int'l which tightened by 425 bps. As in the last week, the rolling equity squeeze in unique stocks and sectors has caused comparable squeezes in corresponding highly-shorted credits.

Some odd names that stand out this week with respect to a disproportionate widening in loans and a tightening in bonds are: BE Aerospace, Centennial Communications, Constellation Brands, First Data Corp and Pantry, although the moves are marginal enough to be likely noise.



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Loans Versus Bonds Relative Value: Week Of April 23

Tightening continues in the universe of 30 tracked names although at a much more moderated pace compared to the prior week. The average loan spread tightened by 24 bps to 674 bps while bonds tightened by 64 bps to 1,317 bps from the prior week. The equity market squeeze continues, and while the squeeze in Neiman Marcus bonds is over, Sealy's is continuing unabated: following last weeks 800 bps tightening, this week Sealy collapsed another 600 bps. And as in the prior week, Sealy loans barely moved. TRW also saw a significant tightening in both bonds and loans.

Some other odd data: in the universe of loans tightening and bond widening we have Neiman Marcus at a 150 bps spread, while the opposite was true for West Corp, PanAmSat, First Data, BE Aerospace and Alliance Imaging.



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Loans Versus Bonds Relative Value: Week Of April 16

Some massive tightening in the universe of 30 tracked names with both major loan and bond moves. The average loan spread tightened by 100 bps to 700 bps while bonds tightened by almost 200 bps to 1,381 bps from two weeks ago. Taking a cue from the equity markets, the most horrendous HY names saw the biggest tightening with Neiman Marcus and Sealy Mattress bonds both collapsing by over 800 bps. Curiously Sealy's loan only tightened by 20 bps, implying a long loan, short bond trade could be a good continuation trade here. The inverse is true with Cenveo, which saw its loans tighten by over 400 bps, while the bonds tightened a mere 207 bps (with TRS being a little tough to find these days, a one side bond long may be the most feasible trade).





source: Reuters/LPC Loanconnector Sphere: Related Content

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Loans Versus Bonds Relative Value: April 6

Yet another improvement in average loan and bond spreads from a weeks ago, when loans were 839 bps and bonds averaged 1574 bps. The Alliance Imaging negative basis is over, with the -15 bps spread last week flipping to a positive 75 bps basis: a nice pickup of 90 bps in a week.

No other notable movers in the 30 name index. If things change markedly, we will notify you.

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Loans Versus Bonds Relative Value: March 31

Slight improvement in average loan and bond spreads from two weeks ago, when loans were 857 bps and bonds averaged 1740 bps. These have tightened to 839 bps and 1574 bps respectively over the last week. Senior-secured negative basis capital structure opportunities have disappeared, compared to several such arbitrage opps available in February 19. While equity markets have continued to ramp up from mid March, credit has moved only marginally tighter.

Notable movers tighter include TRW in both loans and bonds as well as Aeroflex. Most other names had nominal moves tighter. Lastly, the only negative basis (same as we highlighted two weeks ago) in Alliance Imaging, has converged almost to parity at 15 bps, a 55bps convergence from the last loan-bond update.

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Loans Versus Bonds Relative Value: March 17

Since I last wrote about the bond to loan differential on February 19 (original post) things have deteriorated in credit land. The average loan yield has widened by 9 bps to 857 bps while the average bond is now over 300 bps wider at 1740 bps. It seems the equity market rollercoaster has no impact on credit markets (especially in names that have both secured and sub debt) which know just one direction: down.

Notable movers from the last round up include Neiman Marcus and TRW bonds, which have moved 1,191 and 1,505 bps wider respectively. Of the 30 names in the index, only 7 bonds have tightened with the best outperformer being Charter Communications at -112 bps over the past month. On the loan side, while most names have also widened (TRW and Neiman Marcus holding the trophy here as well), Invista staged a dramatic 1,135 bps tightening, along the lines of Zero Hedge's recommendation for a negative hedge here last time this name was discussed.
This week not many negative basis secured-bond relationships: Alliance Imaging has a -70 bps basis although there are better opportunities out there.



(hat tip Loanconnector.com for raw data) Sphere: Related Content

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Loans Versus Bonds Relative Value

A comparable relative value analysis evaluating spreads on most liquid loans and bonds for 30 indicative corporate issuers yields interesting results. The average loan yield is currently at Libor +848 while the average bond spread is at Libor + 1435, a 587 bps differential, and a 230 bps widening to the LTM average of 358 bps.

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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