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Back to 0%: AF-KLM

08 December 2020 by jbchevrel

Today Air France KLM 5y CDS tightened by -15bp, edging closer to the symbolic level of 0% [500bp running]. This highly COVID-sensitive CDS has rallied almost 25% since Nov 2 wides [at 24.5%]. Since then, came the vaccines news. Reasons to believe that the end of the COVID tunnel is at sight [not the Brexit tunnel, whose end remains to be seen]. Yesterday a program on the French channel TF1 reinforced the view that the State would do ‘whatever it takes’ to support AF. According to this, the government is prepared to double its stake [to close to 30% from 14%] and plan an additional €4-5B liquidity by spring 2021. The Dutch government [who also has 14% -- intentionally matched] needs to be consulted and talks are ongoing, aiming an accord by year-end. €10.4B of Franco-Dutch bailout had already been decided in spring. That included €7B from Paris, in the form of €4B of 1y extendable (2x 1y) loan with 6 banks [90% gov-guaranteed] and €3B 4y extendable (2x 1y) loan from the French state [direct]. The counterpart was that AF should become the ‘greenest’ airline, cut dividend and bonuses. Thus, the new AF strategy seems to be 1] to cut exposure to domestic flights in France, where train-based alternatives exist 2] upgrade the quality of longer flights, both from a customer and ecological standpoints. Interestingly, back in spring, as the rumours of the 1st rescue plan emerged, AF KLM 5y CDS retraced to the same 0% level, we are back at today. This rally may feel different from the spring one, as we’ve just seen the stock double [vs -60% back then] and because the end of the COVID tunnel seems to be at sight. However, in absolute terms, neither the stock [at €5] nor the 5y CDS [at 0%] have changed.