Question 3 (10 marks)

Some Global Airlines Are Pulling Out of Credit Default Risk Tailspin

4, March 2021

(7 marks)

The COVID-19 pandemic has not been kind to global airline credit quality. As of February 2021, a total of 21 major global airlines have been downgraded to high yield (HY) status since the start of the pandemic, according to Credit Benchmark data. But that grim statistic does not tell the full story. A handful of airlines are starting to see their credit quality improve and two in particular Singapore Airlines and Ryanair have recently been upgraded and are sitting squarely in investment grade (IG) territory.

Singapore Airlines currently has a Credit Consensus Rating (CCR) in the range of a to aaa and Ryanair has a CCR in the range of bbb to a-.

In the quadrant below, Credit Benchmark has mapped the credit risk profiles for the major global airlines over the past 6 months, spotlighting those who have recently been upgraded, those who are at risk of a downgrade, and those who are hovering in the middle.

Global Airline Credit

Required:

1. (a) Assume you have invested in 5-year bonds of Qantas. Given the above prediction of the deterioration of the credit risk for Qantas, formulate a creative solution to hedge credit risk. In your answer explain how the suggested strategy can be used to hedge credit risk. (250 words)

   (5 marks)

2. (b) What are the implications of speculation using credit default swaps, to the society and economy? Provide examples where necessary. (250 words)