Investors See Lower Risk of US Airlines Default


The price of insurance against US airline debt default has fallen sharply as investors predict the industry will benefit from a new round of funding to help it materialize. coronavirus vaccine next year.

Even as the country’s major carriers consume cash at a rate of tens of millions of dollars per day, pandemic continues to rage in the United States, airline credit default swap prices have fallen to levels not seen since March or, in some cases, February.

The stock prices of the big four carriers – American Airlines, Delta, United and Southwest – have also risen, outpacing the wider stock market since the first results of vaccine trials were released a month ago.

“The immediate existential threat has receded,” Berenberg analyst Adrian Yanoshik said. “And the second very obvious act of this is that a lot of people feel like the vaccines are coming, the world will open up and we will travel again next year.

The cost of credit default swaps, which are repaid when a company defaults on debts, is now a fraction of its May peak, as airlines have used public and private funds to improve their liquidity positions . CDS prices act as a proxy for the market’s opinion on a company’s creditworthiness.

They have fallen further in recent weeks, from 38 to 67% for the four major carriers.

On Monday, the market valued the Delta CDS at 368 basis points – meaning a buyer would pay $ 368,000 a year to insure $ 10 million of Delta debt against default for the next five years – with United at 559 bps and Southwest at 74 bps, according to IHS Markit.

The market continues to treat the American, who has more debt than his peers, as a struggling entity. In addition to $ 500,000 per year, buyers of CDS protection over $ 10 million of its debt must also pay $ 2.5 million up front.

There is bipartisan support for additional government funding of $ 17 billion for the airline industry in a new economic recovery plan in discussion on Capitol Hill. Lawmakers last week signaled further progress towards a deal, though unrelated points of disagreement dashed previous hopes for a stimulus package.

Airlines received $ 50 billion in US Cares Act funds in March in exchange for airlines employing workers during the summer. More … than 350 airlines took the funds. Tens of thousands of employees have been laid off since the program expired on October 1.

The collapse in demand for air travel since the spring has crushed US airlines’ revenues and profits, and they are still burning cash faster than expected.

Ed Bastian, chief executive of Delta Air Lines, said in a note to staff last week that the carrier burned $ 12 million to $ 14 million a day as virus cases hit new records in the United States. Delta had previously forecast that cash consumption would be reduced to $ 10 million per day by December, from $ 24 million in the third quarter.

American put its cash consumption in the upper end of the expected range of $ 25 million to $ 30 million per day for the fourth quarter.

In addition to the government bailout, airlines were able to replace cash with fundraising in public markets. United and American raised equity, while the Big Four raised debt, using assets like planes, landing slots, and loyalty programs as collateral.

“The investment community is looking at the short-term negatives,” Cowen analyst Helane Becker wrote in a note to clients.

“The theme of value trading that is currently taking place in the market has clearly attracted additional capital to the airlines. [year-to-date] performance, but at some point, fundamentals will take over, or at least count.

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