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British Airways Debt Rating May Rise, Credit-Default Swaps Show
By Hamish Risk
Nov. 17 (Bloomberg) -- British Airways Plc, Europe's third- biggest airline, may have its debt rating raised to investment grade after announcing plans to reduce its pension shortfall, according to traders betting on the creditworthiness of companies in the credit-default swap market.
The perceived risk of owning British Airways 350 million pounds ($660 million) of bonds had its biggest weekly drop in a year, according to data compiled by Bloomberg. Credit-default swaps are financial instruments based on corporate bonds and loans that are used to speculate on a company's ability to repay debt.
The prospect for a higher credit rating increased after the London-based company said this week that it had agreed to a 10- year plan to eliminate a 2.1 billion-pound deficit in its employee pension fund. Standard & Poor's had identified the shortfall as an obstacle to obtain a higher rating.
``With a final agreement now highly probable, an upgrade should occur by May next year,'' Pierre Bergeron a credit analyst at Societe Generale SA in Paris. ``Pension resolution was one of the key points for Standard & Poor's in terms of a possible upgrade to investment grade.''
British Airways has a high-risk, high-yield, or junk, ranking of BB+ from S&P, which has a positive outlook on the company's debt rating. Moody's Investors Service rates the airline's debt a level lower at Ba2. Bonds rated below BBB- by S&P and Baa3 at Moody's are considered non-investment grade.
Credit Quality
Credit-default swaps on 10 million euros British Airways bonds fell to 85,000 euros from 96,000 euros on Nov 10, Bloomberg data show. A decline in the cost of the contracts indicates an improvement in credit quality; an increase suggests deterioration.
Investors who buy the contracts, sold by financial firms such as New York-based JPMorgan Chase & Co. and HSBC Holdings Plc in London, are paid 10 million euros in exchange for the notes should the company fail to adhere to debt agreements during the next five years.
``Given the levels where Lufthansa and Air France are trading, credit-default swaps on British Airways look very attractive,'' Bergeron said. He said the British Airways contracts could trade at between 40,000 euros and 50,000 euros within the next six months.
Credit-default swaps on Cologne, Germany-based Deutsche Lufthansa AG, Europe's second-biggest airline, which is rated two levels higher than its British competitor, are currently trading at 35,000 euros, according to Bloomberg data.
British Airways spokeswoman Kate Gay declined to comment on the likelihood of a higher credit rating.
Crossover Index
The perception of European credit quality as measured by the iTraxx Crossover Index improved today. The index, which includes 45 companies with investment-grade and non-investment grade ratings, fell to 236,000 euros from 237,000 euros yesterday. The average daily fluctuation of the index is 1.5 percent, according to Bloomberg calculations.
The iTraxx Europe Index, which includes 125 companies with investment-grade ratings, was little changed at 24,000 euros from yesterday. The index reached a record low of 22,750 euros on Monday.
Credit-default swaps are the fastest growing market for derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.