Buy WEN 5Y Protection @175bps

After today's dismal Wendy's/Arby's new issue which came at a dramatic 10% plus yield and was covered sub-par, it is clear that the HY market (both cash and synthetic) has become highly differentiated. The Haves and Have-Nots in cash land are providing some great guidance for credit shorts in synthetic land.

Wendy's CDS has been crushed by short-squeezing as DTCC data shows considerable derisking over the course of this rally seems to have been swallowed up somewhere. We suggest that the basis (Cash-CDS) is so large that even with an aggressive bid for the bonds, faster money will run into the CDS to lock in the basis (since decent sized basis trades are becoming less frequent in IG and XO names).

We would suggest holding entry til post the roll since we would expect a push tighter tomorrow in the June contracts as shorts cover and roll. At 175bps (or thereabouts), WEN is at multi-month tights, ranks extremely low on our valuation model, and the basis is too good to ignore (though we like the outright short for better overall liquidity).