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27 April 2020 by jbchevrel

This post is boringly similar to the one written about TUIGR a few weeks ago. As you know, Air France-KLM (AFKLM) had been one of the hardest-hit names in XOver at some point, with their 5y CDS reaching 800bp+ at its peak, based on our close-to-close data. Since then it retraced almost half of the move, on the back of the expectation of state aid. Late last week, AFKLM secured ~€10bn in state aid from both French and Dutch governments. The French government agreed a €7bn loan package. The Dutch government said that it was still in talks but pledged between €2bn and €4bn. In counterparty, dividends and bonuses will be suspended and AFKLM will become the ‘greenest’ airline in the world - if anyone is naive enough to believe Mr Le Maire. Looking at the details of the French €7bn support. It will be split into a €4bn 1y extendable loan (with 6 banks -- 90% guaranteed by the state). This 1y loan can be extend 2x 1y. The other €3bn will be a 4y loan from the French state, directly. This 4y loan can be extend 2x 1y as well. AFKLM shares are down more than -50% YTD. And these are pretty much at the low, here. These didn’t benefit much from state aid news and that’s logical I guess because even if the state aid loans help preventing an otherwise imminent liquidity shortage at AFKLM, it does not bring in any net asset into the company. Thus it is logical to see CDS tighten while the stock price remains stuck at the low end of the range (~€4.5). Again, ‘no dividend’ was a counterpart to the deal. From now on, FR/NL states may get their money back one day. This felt like a necessary step for them to avoid seeing their ~14% stakes going to zero – stakes of which they already lost more than half. Now why is France putting in €7bn while the Netherland put only €2-4bn? Probably because AF is bigger and less profitable than KLM, something discussed before in Nov 6th post.