Short-dated credit protection on Delta Air Lines was being snapped up last week as market concern over a near-term credit event grew. Players were looking to buy credit-default swaps with December 2005 expiries, the same date a series of Delta bonds mature, because they believe the airline could for bankruptcy before that time. This caused the price of protection to increase to 500 basis points running with a 63bps upfront charge, from 500bps running and 30bps upfront a week and a half ago. One trader explained protection on distressed debt always sells at a fixed base rate in addition to a variable rate.
The airline announced a second-quarter loss of USD382 million July 21 despite the company having implemented Operation Clockwork, a major operational overhaul designed to cut costs, earlier this year. The trader said the market expect Delta to file for Chapt. 11 in the near-term because U.S. bankruptcy laws are set to change in October. Delta will file for bankruptcy before then to take advantage of current rules, he said. For this reason, players say the airline will default on its December 2005 bonds.
Standard & Poor's rates Delta CC and Moody's Investors Service gives it Ca.
