Airlines bonds under pressure in thin market

Airlines were in focus in the European corporate bond market on Friday as British Airways ground staff voted in favour of a strike and default swaps on SAS switched to being quoted on an "upfront" basis.
Elsewhere, the summer conspired to drain liquidity from the investment-grade markets, although lower equity markets led to some pressure on longer-dated telecoms bonds.
The FTSE Euro Corporate Bond Index showed investment-grade corporate bonds in euros yielding an average 51.2 basis points more than similarly dated government bonds at 1455 GMT, unchanged on the day.
Credit derivatives traders said they started quoting default swaps on airline SAS on an "upfront" basis on Friday, meaning that the entire premium for five years of credit insurance is charged in advance.
Trade on an upfront basis indicates increased concern about a company's credit quality. Usually, premiums under default swap contracts are paid on a running basis, with the insurance buyer making a payment each year.
Late on Thursday, credit ratings agency Moody's Investors Service revised its outlook on SAS's ratings to negative. It rates the company's senior unsecured debt at B2, five notches below investment-grade status.
By 1415 GMT on Friday, the upfront premium to insure 10 million euros of the Scandinavian airline group's debt was quoted bid at 22 percent and offered at 27 percent, meaning it costs between 2.2 million and 2.7 million euros to insure the debt for five years.
"It's switched to upfront today," said one trader. "It's been quite a while since I've seen a bond go upfront. It's not a good sign technically."
The premium on a running basis was quoted 20 basis points wider at 710 basis points on Friday afternoon, or 710,000 euros a year to insure the debt for five years.
Credit default swaps on British Airways, meanwhile, were five to 10 basis points wider as ground staff at the airline prepared for a strike that threatens to throw summer travel at Britain's airports into chaos unless the airline agrees to better wages. Five-year swaps on BA were at 360 basis points by Friday afternoon.
Bonds of ProSiebenSat.1, the top German commercial broadcaster, outperformed a generally softer high-yield market after core earnings soared 84 percent in the second quarter, clearly beating estimates.