Airline exposures cast shadow over CDOs and derivatives trading

Collateralised debt obligation (CDO) investors assessing their credit risk exposure should be aware that recovery prospects among airlines bonds vary dramatically from company to company, according to Goldman Sachs.

Research from the US firm’s New York credit derivatives strategies team suggests the recovery prospects for bonds are highly dependent on whether issuance is secured and on the quality of assets backing the bonds. More recently issued bonds, for example, tend to be more valuable as they are often backed by newer aircraft.

The disparity in pricing is most pronounced for United Airlines. At the end of last week, its secured debt was trading at spreads more than five times greater than its unsecured debt. The US company has around $1 billion in debt maturing this year, so concerns over short-term liquidity have heightened perceptions of credit risk among investors.

Dealers acting as commodity derivatives counterparties to airlines are also worried. Trading desks are demanding increased collateralisation of trades from airline clients. Speaking in the forthcoming November issue of Risk, several houses said that most airlines are reluctant to put up collateral, and in Europe, in particular, a number have refused outright. These dealers, speaking to Risk on condition of anonymity, claimed the airlines in question have simply bought their hedges from other houses with less stringent counterparty credit risk management.