Citi goes online with Expedia crossover basis trade

In its latest High Yield Weekly research report, Citi says that crossover credits continue to offer attractive opportunities for basis trades despite the narrowing in the basis for many investment grade names. The report suggests buying the 7.4565 2018 bonds of online travel company Expedia, which trade at a spread equivalent of 286 basis points, and hedging this position by buying the company’s 95bp five-year credit default swap at a DV01-weighted ratio of 1.5.

Expedia, which already carries a weak Standard & Poor’s investment grade rating, could see its basis rally 100bp if Moody’s follows suit and lifts it out of the junk category. As the report points out, Expedia’s management has a stated commitment to achieving investment grade status, and is targeting leverage of between two and three times.

Citi recommends putting on the basis trade using the 2018 bonds because of their 2013 put option at par. Although that option is currently out of the money, since the bonds are trading at 109, a future rise in interest rates of just 150bp could give the option some value.