SAS Has 78% Chance of Joining AMR in Default: Corporate Finance

Jan. 16 (Bloomberg) — Credit-default swaps insuring the bonds of SAS AB signal there’s a 78 percent chance of the Nordic region’s largest carrier being unable to meet its commitments, making it the world’s riskiest airline debt.

It now costs 3.6 million euros ($4.6 million), or 36 percent, in advance and 500,000 euros annually to insure 10 million euros of the Stockholm-based company’s debt for five years. That’s up from 1.4 million euros in September and makes the contracts the most expensive among airlines tracked by swaps data provider CMA.

Investors are concerned SAS will lose support of the governments of Sweden, Norway and Denmark should they succeed in plans to sell their 50 percent stake in the company, and a new owner will struggle negotiating with 37 different unions, competing with low-cost carriers and slowing sales. Swaps on AMR Corp. traded at 57 percent upfront on Oct. 26 before soaring to 83 percent on Nov. 29, after the parent of America Airlines surprised dealers by seeking protection from creditors.

“There’s still great uncertainty in SAS and there’s an increased fear of the sustainability of the company as a standalone firm in the longer term,” said Henrik Blymke, a senior credit analyst a Stockholm-based SEB AB, Sweden’s fourth- largest bank. “Investors are also concerned they will have problems refinancing the maturing debt at acceptable levels given the current market conditions.”

Cost Cutting

SAS, which completed $1.1 billion of cost-cutting in June, has almost 1.5 billion euros ($1.9 billion) of debt outstanding, the company said in a Nov. 8 statement. It has 113 million euros of bonds coming due in May and two notes issued in March 2011 and maturing in 2014 have clauses enabling bondholders to sell the bonds back at par if the governments reduce their stake to below 25 percent, Blymke said.

The company’s debt was more than six times its earnings before interest, tax, depreciation, amortization and rent at the end of September, compared with 10 times a year earlier, according to an earnings report.

A total of 1,855 credit-default swaps contracts are outstanding on SAS, covering $383.5 million of debt, according to the Depository Trust Clearing Corp., which runs a central registry for the market. The contracts traded at a record 3.7 million euros upfront Jan. 6 and sellers of default protection traditionally demand payment in advance when they perceive an imminent risk of default.

“Normally we don’t comment on what the market believes,” said Sture Stoelen, the head of investor relations for SAS in Stockholm. “Liquidity is an issue with this security and may not be reflecting what we can get funding at.”

Air France-KLM

Swaps on rival Air France-KLM Group, Europe’s biggest airline, cost 961 basis points, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market. The Paris-based carrier has about 3.2 billion euros of debt outstanding, according to data compiled by Bloomberg, and there are 3,984 swaps contracts covering $2.4 billion of debt, DTCC data show.

Contracts on International Consolidated Airlines Group SA, the region’s third-largest airline which includes British Airways and Spain’s Iberia, cost about 769 basis points a year for five years, while contracts on Deutsche Lufthansa AG trade at 293 basis points. London-based IAG has about 2.3 billion euros of debt while Lufthansa owes more than 3.1 billion euros.

Industry Profit

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.

The airline industry’s profit will fall 49 percent this year, more than predicted earlier, as the sovereign-debt crisis in the euro region hurts economic growth, the International Air Transport Association said last month.