At least $200 million of El Paso Corp.'s $1.25 billion term loan has traded in the last two weeks as market participants have embarked on a credit protection play. Investors are playing the bank piece against the default protection, which has come in 50 basis points tighter than the bank debt, a trader said. The coupon on the bank debt is LIBOR plus 2 3/4%. "You are getting a 275 spread and you can buy protection for 225, so you can hedge it. You can eliminate your risk, pass it along to the seller and secure 50 basis points," one trader noted. El Paso's secured "B" loan traded at 101 3/4-102. Meanwhile, the company's $1 billion synthetic letter of credit was quoted around 101 1/2-101 3/4.
The spread play was getting squeezed later in the week as buyers started driving up the price of El Paso's bank deal, a trader said. With the paper at 102, playing the difference between the spreads makes less sense. But even at 102, hungry hedge funds can find some value, a buysider noted. "Institutions that don't have any place to put their money would go for it," he said. Officials at El Paso could not provide comment on trading levels in the secondary market.
Last October, the gas transportation and storage company launched its five-year "B" loan as part of its effort to refinance a $3 billion revolver that expires in June (LMW, 22/10). J.P. Morgan and Citigroup lead the financing. The loan came on the heels of a $1.75 billion revolver that the company pitched earlier that month. Both loans priced at LIBOR plus 2 3/4%.