Investors insure against risk of Emirates debt default

19 January 2010

Investors plan to hedge positions because of economic volatility

Investors have, for the first time, started to insure against the likelihood of Dubai-based Emirates Airline defaulting on its debts.

The first prices for insuring against an Emirates Airlines default appeared on 11 January, with the spreads on five-year credit default swaps (CDS), the instruments used to insure borrowing, opening at 395 basis points.

Each basis point equates to an annual cost of $1,000, to insure $10m of debt.

The CDS spreads later narrowed to 357 basis points by 19 January and, significantly, is lower than the cost of CDS spreads on Dubai government debt, which were priced at 429 basis points on 19 January.

In December, Emirates insisted it would not need government help to repay $1.7bn of debt which is due to mature by 2013 (MEED 8:12:09).

The debt is held in a mix of loans and bonds.

The emergence of trading in Emirates CDS does not mean traders expect any imminent default by the airline, according to one London-based trader, but is a reflection of the wider uncertainty in the market.

“Investors are just trying to hedge their positions at the moment because of market volatility,” says the trader.

He adds that Emirates is still considered one of Dubai’s strongest assets, which has lead to its CDS spreads being lower than those of the emirate’s government.

The pricing of its CDS spreads gives a good indication of the price that Emirates would have to pay if it were to seek fresh funding and implies that the airline would have to pay about 360 basis points above the London interbank offered rate (Libor) to get fresh finance.

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