Credit Markets Update: US airline woes push up protection costs on European carriers

The cost of credit protection on European airlines widened by 10 to 20 basis points this week following investor concerns about the state of the American airline industry.

US airline stocks plummeted on Monday following US Airways Group's announcement on Sunday that it had filed for Chapter 11 bankruptcy protection, becoming the first major airline to take such a move since the September 11 terrorist attacks. On Tuesday, both United Airlines and American Airlines announced sweeping cost-cutting and revenue-building plans including layoffs and flight and fleet reductions. Credit protection on the major US carriers has been unavailable since before September 11.

But traders noted the development had some impact on prices for European airlines. Five-year credit default swaps on Air France and Lufthansa widened 10bp today. “We are seeing a bit more liquidity in these names since the US news hit,” said one trader in London today. Protection on Air France traded at 130/150bp, while Lufthansa stood at 165/175bp.

Five-year protection on British Airways traded at 620/670bp, from 600/660bp yesterday. “Its protection is now trading back at the levels we saw in February,” said another London-based trader. The cost of protection for BA had narrowed to 440bp-mid back in June. At the start of August, the company announced a trebling in Q1 profits, but warned revenues were likely to be lower for the year due to economic and political uncertainty. Since August, BA has traded at levels nearer 600bp levels in the credit default swap market.

Elsewhere, protection on Ford remained bid at high levels. Traders said concerns over falling manufacturing sales in the US and rumours of potential credit downgrades for the motor manufacturer have driven the recent widening of Ford’s bonds and credit derivatives spreads.

At the end of last week, five-year protection on Ford was quoted at 480/510bp, 100bp wider on the week, and traded at a similar level today. Ford protection is currently trading at levels nearly 180bp above that for fellow auto maker, General Motors.

Standard & Poor's downgraded French media group Vivendi Universal’s credit rating to double-B from an investment grade triple-B minus today, following announcements of a first-half loss and worse than expected financial results. Credit protection on Vivendi jumped from 850/1000bp to 900/1,200bp immediately following the news, but traders said there was no noticeable knock-on effect on bids for Vivendi Environnement’s credit protection. Standard & Poor's said its ratings and outlook for the France-based multi-utility Vivendi Environnement remain unchanged.

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