CDOs are not expected to take a substantial hit from the preceding week's dual bankruptcy filings of Delta Air Lines and Northwest Airlines, according to a report by Fitch Ratings.
At least through exposure to unsecured debt from the corporate debt, the deals that had a greater than 2% concentration were generally seasoned enough, past the reinvestment period, to provide enough overcollateralization to counter the bankruptcies.
On Sept. 16, Fitch downgraded Delta's issuer default rating to D' and subsequently placed two Delta ETCs and four of its EETCs on rating watch negative. Northwest was also downgraded to D'. The rating agency placed six of Northwest's EETCs on rating watch negative.
Bonds associated with the carriers traded up following the news, according to one trader, which could mean better recovery for those trading out of downgraded positions. Despite downgrades, the deals have generally continued to perform as troubled U.S. airlines have continued to operate throughout bankruptcy proceedings (see ASR 9/19/05).
As per bankruptcy procedure, neither of the airlines are required to make payments toward aircraft financing deals, including ETCs and EETCs. During that period, the troubled airline carriers are due to decide if they will resume or permanently stop the payments, interest and principal of which are due semiannually. If payments are stopped, the aircraft collateral is returned. Both are expected to downsize their fleets.
Twenty-two Fitch rated cash and synthetic CDOs have greater than a 2% exposure to Northwest and Delta through EETC ownership; 95% of those are U.S. deals. Only one of those deals had a relatively high exposure, according to Fitch analyst Marion Silverman. Of those that had a greater than 2% exposure, the average amount of exposure was 4%, she added.
"Part of the reason that it is not a huge concern is that these were already downgraded exposures," Silverman said.
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