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From Buy To Sell: LHAGR update

10 June 2020 by jbchevrel

Lufthansa (LHAGR) was the worst performing CDS in the Main today, wider by c+25bp to 285. The name was double-downgraded to sell from buy at UBS, according to Bloomberg, with price target slashed by more than 2/3 (cut to EU5.85 from EU18). That was based on the expectation that the carrier’s passenger traffic will remain well below 2019 levels until at least 2024. UBS argued that LHAGR will generate operating losses in 2020 and 2021 and produce a pretax and net loss in 2022, given its increased cost of financing due to the lending provided by the government. The stocks lost -6%, Bloomberg reported that hedge funds Marshall Wace and Citadel had reduced their short positions on the name. It might be a more bearish scenario ahead of us for LHAGR stock than for credit, as earnings dilution from a stake the German government weighs on the stock while an imminent credit event looks less likely than this spring. That said, higher interest payments from the debt will weigh on financial performance, affecting both asset classes. Analysts currently disliking the name mention two aspects specific to LHAGR. First, the company’s size, Lufthansa has about 770 aircraft, meaning it is bleeding cash faster than rivals. Second, LHAGR business is more heavily focused on business travel, which is expected to take more time to recover. Macro-wise, FOMC delivered the first forecasts since December. The medians look solid: EOY 2020 -6.5% GDP and 9.3% unemployment. Now, the ranges are so wide (unemployment 7%/14%!) we could probably have waited another 3 months. The enthusiasm post release did not last very long, and CDX is c73bp, as I write.