Bloomberg News

Air France Leads Drop in High-Yield Bond Risk as Issuance Slows

November 02, 2012

Air France-KLM (AF) Group led a decline in the cost of insuring high-yield debt in Europe this week as bond issuance slowed.

Credit-default swaps on Air France fell 20 basis points today to 693, the lowest level in more than a year and headed for the biggest weekly drop since January 2009. Sales of bonds by banks and non-financial companies slowed to 3.6 billion euros ($4.6 billion), the smallest weekly total since the beginning of August and almost a quarter of this year’s weekly average of 12.7 billion euros, according to data compiled by Bloomberg.

Air France and Deutsche Lufthansa AG reported earnings that beat analysts’ forecasts this week as Europe’s two biggest airlines began to reap the benefits of moves to eliminate thousands of jobs. Corporate credit risk indexes were little changed before a report that may show U.S. unemployment rose in October.

“The cost cutting was well received,” said Harpreet Parhar, a strategist at Credit Agricole SA (ACA) in London. “That was seen positively for the airline sector as a whole.”

Contracts on Air France were the best-performing this week in the Markit iTraxx Crossover Index of credit-default swaps on 50 mostly high-yield companies. That measure was little changed today at 514 basis points and has dropped 21 basis points so far this week. A decline signals improvement in perceptions of credit quality.

British Airways

Swaps on British Airways parent International Consolidated Airlines Group SA (IAG), which reports third-quarter results on Nov. 9, dropped to a 15-month low of 552 basis points, Bloomberg data show.

Arcelor Mittal bonds led declines in the Bank of America Merrill Lynch EMU Corporates Non-Financial Index. The 4.625 percent notes due 2017 fell 2.5 percent this week, pushing the yield up 61 basis points to a one-month high of 5 percent, according to data compiled by Bloomberg.

U.S. unemployment rose in October from a three-year low, Labor Department figures to be released at 8:30 a.m. in Washington may show. The jobless rate climbed to 7.9 percent from 7.8 percent in September, economists forecast in a Bloomberg survey. Payrolls will gain 125,000, from 114,000 a month earlier, economists said in a separate survey.

The Markit iTraxx Europe Index of 125 companies with investment-grade ratings fell two basis points so far this week to 127 and was little changed today.

The Markit iTraxx Financial Index linked to senior debt of 25 banks and insurers dropped four basis points this week to 171 and the subordinated index declined eight to 300.

A basis point on a credit-default swap protecting 10 million euros of debt from default for five years is equivalent to 1,000 euros a year. Swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a borrower fail to adhere to its debt agreements.

To contact the reporter on this story: Abigail Moses in London at amoses5@bloomberg.net

To contact the editor responsible for this story: Paul Armstrong at parmstrong10@bloomberg.net


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