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Friday, 21/06/2018, 02:11:08 AM
Airline Bonds Rally as Continental, UAL Merge: Credit Markets
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Airline bond yields fell to the lowest relative to the rest of the junk-bond market in more than two years as a rebound in air traffic makes it easier for carriers to repay debt.

The extra yield investors demand to own airline bonds instead of Treasuries dropped to 6.04 percentage points as of April 30, according to Bank of America Merrill Lynch index data. That’s 0.43 percentage point wider than junk bonds on average, the smallest difference since March 2008.

The return of business travelers and a rise in average ticket prices is offsetting a 64 percent jump in the average spot-market price for jet fuel from a year earlier. United Airlines parent UAL Corp., which agreed on May 2 to merge with Continental Airlines Inc., was put on review for a possible upgrade from Caa1 by Moody’s Investors Service and its B- rating was placed on CreditWatch with “positive” implications by Standard & Poor’s.

“People view airline debt as less risky as the economy improves,” said Jeff Straebler, a fixed-income strategist at RBS Securities Inc. in Stamford, Connecticut. “With the economy slowly improving, and most people feel that it’s going to stay that way, really the big concern is simply oil.”

Airline bonds have returned 9.35 percent this year through April 30, 2.19 percentage points more than high-yield bonds, Bank of America Merrill Lynch index data show. Spreads have narrowed 229 basis points, or 2.29 percentage points, compared with a tightening of 78 basis points to 561 for all speculative- grade credit.

Fed Survey

Elsewhere in credit markets, the extra yield investors demand to own company debt instead of Treasuries was unchanged at 149 basis points, down from 176 at the end of 2009, Bank of America Merrill Lynch’s Global Broad Market Corporate Index shows. Average yields rose 3.3 basis points to 3.958 percent.

A benchmark gauge of corporate credit risk rose by the most in a week amid concern that a sovereign debt crisis in Europe is spreading. The Markit CDX North America Investment Grade Index Series 14, which investors use to hedge against losses on corporate debt or to speculate on creditworthiness, increased 5.7 basis points to a mid-price of 96.2 basis points as of 1:36 p.m. in New York, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates and falls as it improves.

“It’s moved from an issue of Greece to one of systemic, liquidity-based risks,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “Some global financial institutions will be exposed.”

Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

Credit-Card Bonds

Bank of America Corp., the largest U.S. bank, plans to sell $750 million of bonds backed by credit-card payments, according to a person familiar with the offering. The Charlotte, North Carolina-based lender last issued asset-backed securities tied to credit cards in May 2009, according to data compiled by Bloomberg.

UAL, based in Chicago, and Continental, in Houston, agreed to merge in a stock swap valued at more than $3 billion to create the world’s largest airline, reviving a deal that fell apart two years ago.

“Consolidation is a positive,” Straebler said in a telephone interview. “If you have fewer large players, they are less likely to try and expand market share at the cost of profitability.”

United’s yield, or average fare per mile, climbed 12 percent in the first quarter in the company’s main jet business. Revenue for each seat flown per mile, a measure of demand and ticket prices, jumped 19 percent while costs on the same basis rose 8.3 percent.

Airline Junk

Airlines issued $2.66 billion of high-yield notes last year, compared with no sales in 2008 and more than four times the amount of offerings in 2007, Bloomberg data show. United, the only airline to offer dollar-denominated junk bonds in 2010, sold $700 million of notes on Jan. 11, the data show.

The carrier’s $500 million of 9.875 percent senior secured debt due in August 2013 has risen about 6.7 cents from issue to 106 cents on the dollar, according to RW Pressprich & Co. United’s 12 percent secured notes have jumped 12.7 cents to 108.

“Airlines look to be in good financial shape for 2010,” analysts at independent debt research firm CreditSights Inc. wrote in an April 20 report. Carriers’ “access to capital markets should allow financing of 2010 aircraft,” capital expenditures and for refinancing of secured debt maturities, they wrote.

“Credit quality has improved, but not to the same degree as spreads have tightened,” said Jonathan Root, an analyst at Moody’s in New York. “The investors have comfort with the higher risk because they have the airplanes as security.”

Of the $3.36 billion of airline debt issued since the start of 2009, 91.1 percent has been secured by collateral, Bloomberg data show.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

Source: Bloomberg

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