Tuesday, March 31, 2009

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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A loan is a type of debt. This article focuses exclusively on monetary loans, although, in practice, any material object might be lent. Like all debt instruments, a loan entails the redistribution of financial assets over time, between the lender and the borrower.

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Legally, a loan is a contractual promise between two parties where one party, the creditor, agrees to provide a sum of money to a debtor, who promises to return the money to the creditor either in one lump sum or in parts over a fixed period in time. This agreement may include providing additional payments of rental charges on the funds advanced to the debtor for the time the funds are in the hands of the debtor (interest).