28 August 2020 by jbchevrel
Today Lufthansa AG (LHAGR) consolidated yesterday’s -20bp move tighter, adding another -2bp. This week has been positive for airliners. In the US, American Airlines 5y CDS has crossed below 50% and the curve steepened, pushing the 1y point close to 15%. That move was supported by the announcement of job cuts (Tuesday post). In Europe, Finnair has been the first € airliner to sell a bond, COVID to date. The Finnish operator issued €200m 10.25% hybrid perps to refinance the existing 7.875% one and avoid the step up to 13% in October. Demand was solid (€260m). It’s now trading 101. Part of why investors were confident with this deal is the fact that the Finnish govt owns a majority stake of 55% in Finnair. Finnair isn’t in our universe, but that development surely supported the sentiment toward € airline credit. Today not only LHAGR consolidated yesterday’s -20bp, but Air France KLM CDS also tightened -15bp. Pimco’s global credit CIO was on Bloomberg today, he argued for the airliners credit case, noting that most of them have 18-36 months of liquidity, so any vaccine that comes out over the next six to 12 months as businesses and consumers start to travel again, you could see a rebound and that’s the next wave of the rally. August rally in airliners’ equities has also been a pain trade, according to a HedgeWeek note from yesterday. Shorts against the 10 largest airlines throughout 2020 cost HFs about €800m in August, leaving these YTD +€1.4bn. It’s surely too soon to call it a reversal, but there has definitely been a retracement in the sector.