Thursday, February 19, 2009

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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Anonymous said...

wonder if that bond-loan basis is executable...sounds like pretty off the run that you are on to it definitely going to disappear.. =)

DINKs said...

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?

Anonymous said...

"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.

Anonymous said...

I think he's saying

Anonymous said...


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.