BA – CDS 111, Base Case iCDS 13bps, Negative Case iCDS 28bps, 2027 2.800% Bond YTW of 3.143%, iYTW of 2.023%, Baa2 Rating from Moody’s, IG4 (equivalent to Baa2) Rating from Valens, Low Refinancing Need
February 22, 2022
- Credit markets are overstating BA’s credit risk with a YTW of 3.143% and CDS of 111bps, relative to an Intrinsic YTW of 2.023% and Intrinsic CDS of 13bps. Meanwhile, Moody’s is accurately stating the firm’s fundamental credit risk, with its investment grade Baa2 credit rating in line with Valens’ IG4 (Baa2) credit rating.
- Incentives Dictate Behavior™ analysis highlights mostly positive signals for credit holders. Specifically, BA’s compensation framework should drive them to focus on all three value drivers: margin expansion, asset efficiency, and top-line growth, which should lead to Uniform ROA expansion and increased cash flows available for servicing obligations. Additionally, management has no change-in-control compensation, and given the firm’s scale, it is unlikely to be a target for a buyout or acquisition, reducing event risk for creditors
- Earnings Call Forensics™ of the firm’s Q4 2021 earnings call highlights that management may have concerns about the pace of the recovery of travel, particularly for European and South American, commercial, and pass-through traffic. Moreover, they may be downplaying concerns about the buildup of their finished goods inventory, and they may lack confidence in their ability to sell inventory while keeping the production rate low and develop a new differentiated plane model. Furthermore, management may have concerns about the sustainability of lower customer concession rates, the progress of their planned development process revamp, and lower sales volumes. Finally, they may lack confidence in their ability to improve free cash flow and successfully deliver planes with quality up to standards.