Investors see lower risk of default by US airlines
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The price of insuring against a debt default by US airlines has fallen sharply as investors anticipate the industry will get a new round of bailout funding to help see it through to a coronavirus vaccine next year.
Even as the country’s main carriers burn through cash at a rate of tens of millions of dollars a day, and the pandemic continues to rage across the US, prices for airline credit default swaps have fallen to levels not seen since March or, in some cases, February.
Share prices for the big four carriers — American Airlines, Delta, United and Southwest — have also risen, outpacing the broader stock market since the first vaccine trial results were published a month ago.
“The immediate existential threat has receded,” said Berenberg analyst Adrian Yanoshik. “And the very obvious second act of this is a lot of people feel like vaccines are coming, the world will open up and we’ll travel again next year.”
The cost of credit default swaps, which pay out when a company defaults on its debts, is now a fraction of their peak in May, as airlines have tapped both government and private market funds to improve their liquidity positions. CDS prices act as a proxy for the market’s view of a company’s creditworthiness.
They have tumbled again in recent weeks, by between 38 per cent and 67 per cent for the four big carriers.
The market on Monday priced Delta CDS at 368 basis points — meaning a buyer would pay $368,000 a year to insure $10m of Delta debt against a default for the next five years — with United at 559bp and Southwest at 74bp, according to IHS Markit.
The market continues to treat American, which has a heavier debt load than its peers, as a distressed entity. As well as $500,000 annually, buyers of CDS protection on $10m of its debt must also pay $2.5m upfront.
There is bipartisan support for another $17bn of government funding for the airline industry in a new economic stimulus package under discussion on Capitol Hill. Lawmakers last week signalled renewed progress towards a deal, although unrelated areas of disagreement have dashed previous hopes for a stimulus package.
Airlines received $50bn in funds from the US Cares Act in March in exchange for airlines employing workers through the summer. More than 350 airlines took the funds. Tens of thousands of employees have been furloughed since the programme expired on October 1.
The collapse in demand for air travel since the spring has crushed revenues and profits at US airlines, and they are still burning cash faster than they forecast.
Ed Bastian, Delta Air Lines chief executive, said in a memo to staff last week that the carrier was burning $12m to $14m a day as virus cases hit new records in the US. Delta had earlier forecast that cash burn would be down to $10m a day by December, from $24m in the third quarter.
American put its cash burn at the high end of the predicted $25m to $30m a day for the fourth quarter.
As well as taking a government bailout, airlines have been able to replace cash with fundraising in the public markets. United and American have raised equity capital, while all the big four carriers have raised debt, using assets such as planes, landing slots and frequent flyer programmes as collateral.
“The investment community is looking through near-term negatives,” Cowen analyst Helane Becker wrote in a note to clients.
“The value trade theme currently unfolding in the market has clearly attracted incremental capital to the airlines given [year-to-date] performances, but at some point fundamentals will take over, or at least matter.”
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