Capital Structure Arbitrage

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I have noticed that the spread between firm borrowing rates and FCF yields has increased to high levels in firms large and small.  For large firms such as Intel and Microsoft the FCF yield can be multiples of the borrowing rates.  For smaller firms the spreads are very high.  For example for Lin TV, its borrowing rate is from 7 to 8% based upon current bond pricing but the equity FCF yield is in the mid 30%s.  For Cumulus/Citadel the borrowing rate is 7% but the FCF yield is in the mid 40%s and for Entercom the borrowing rate in 6% and the FCF yield is again in the mid 40%s.  I remember some capital structure aribitrage firms shutting down after the crisis, maybe this is the result.  For some reason there are buyers for the debt of these firms at much lower rates the holders of the equity.  Has anyone else noticed this in some of the firms they own?

 

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