Buy bonds of loan-extension candidates, recommends Barcap

In a recent report, Barclays Capital calculates that 56 revolving loans and 24 term loans have been extended this year. It says the average revolver has been extended by 1.7 years for a spread increase of 220 basis points and an average fee of 44bp. For term loans, the average maturity extension is two years, the spread went up by 204bp and the borrower paid an average amendment fee of 29bp.

The researchers say that among the best trading strategies around loan extensions is to buy the bonds that will be “leapfrogged” by a loan extension. These bonds typically trade at a significant discount to par on liquidity concerns but then bounce up when the restructuring is announced.

Potential candidates for loan extensions are those in relatively good health, with total loans outstanding of $750 million or more and a top heavy capital structure. In addition, those whose loans are owned in many CLOs are more likely than others to gain approval for a loan extension.

Among Barclays’ loan extension candidates – see below – are Rite Aid, Burlington Coat Factory, Avis and Travelport. All have bonds trading between 70 and 85 cents in the dollar, notes the report.

Potential candidates for loan extensions:

Source: Barclays Capital