Airlines? Credit Risk Increases as Crude Surpasses $113 a Barrel - Bloomberg


Airlines’ Credit Risk Increases as Crude Surpasses $113 a Barrel
By Mary Childs - Apr 8, 2011
The cost to protect airline debt climbed as crude oil rose above $113 for the first time in 30 months.

Credit-default swaps on AMR Corp. (AMR) and Continental Airlines Inc. surged as oil climbed 2.5 percent after Barclays Capital said strikes on Libyan fields by forces loyal to Muammar Qaddafi ended hopes for a prompt export resumption and may send prices toward $130 a barrel.

“The whole margin story’s going to be a big issue this quarter to see how much rising commodity prices have affected the bottom line,” said Adam Richmond, a strategist at Morgan Stanley in New York. “Sectors that are very sensitive to commodity prices from consumer discretionary, retail, travel, sectors like that, this is a big focus.”

Airlines are “all very worried” about crude oil prices, AMR Chief Executive Officer Gerard Arpey said at a conference in Dallas.

Credit-default swaps on AMR soared to 21 percent upfront, according to broker Phoenix Partners Group. That’s in addition to 5 percent a year, meaning it would cost $2.1 million initially and $500,000 annually to protect $10 million of AMR’s debt. Swaps on United Continental Holdings Inc. (UAL), Delta Air Lines Inc. (DAL) and JetBlue Airways Corp. (JBLU) jumped to a mid-price of 8.5 percent upfront, the data show. Swaps on Continental Airlines increased to 7.5 percent upfront.

Expedia Split

Crude oil for May delivery rose $2.77 to $113.07 a barrel on the New York Mercantile Exchange, the highest settlement since Sept. 22, 2008. Futures advanced 4.7 percent this week and are 32 percent higher than a year ago. Jet fuel surged 3.4 percent to the highest since September 2008.

The cost to protect debt of Expedia Inc. (EXPE) surged after the biggest online travel agency by revenue said it will split into two businesses. Credit-default swaps jumped 20.1 basis points to 174.8, the highest level since Sept. 23, CMA data show.

The cost of protecting corporate bonds from default in the U.S. was little changed. The Markit CDX North America Investment Grade Index held at a mid-price of 93.7 basis points as of 4:06 p.m. in New York, according to index administrator Markit Group Ltd. Investors use the measure to hedge against losses on corporate debt or to speculate on creditworthiness.

The credit swaps index, which typically falls as investor confidence improves, dropped as much as 1.6 basis points earlier, after yesterday’s 0.9 basis point rise.

‘Rallying Back’

“Yesterday the aftershock in Japan created somewhat of a scare, and because that’s turned out to not have a major negative impact, the market’s rallying back a little bit,” Richmond said.

No unusual conditions were observed at Tokyo Electric Power Co.’s Fukushima Dai-Ichi nuclear plant after a magnitude-7.1 temblor in Japan killed two people and injured 93 in the biggest aftershock since the day of the March 11 disaster. In Germany, Europe’s largest economy, exports grew more than forecast in February as the global recovery boosted demand, the Federal Statistics Office in Wiesbaden said.

Earnings for members of the Standard & Poor’s 500-stock index are expected to show 7.7 percent growth for the first quarter compared with the similar period of 2010, according to a Bloomberg survey.

The price of Markit’s CDX North America High Yield Index climbed 0.1 percentage point to 102.9 percent of face value. The high-yield index gains as investor confidence improves.

Credit swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.

To contact the reporter on this story: Mary Childs in New York at [email protected]

To contact the editor responsible for this story: Alan Goldstein at [email protected]

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