DAL – CDS 267bps, Base Case iCDS 119bps, Negative Case iCDS 148bps, 2025 7.000% Bond YTW of 3.225%, iYTW of 2.885%, Baa3 Rating from Moody’s, IG4 (equivalent to Baa2) Rating from Valens, Low Refinancing Need
- CDS markets are overstating credit risk, with a CDS of 267bps relative to an Intrinsic CDS of 119bps, while cash bond markets are accurately stating credit risk with a YTW of 3.225% relative to an Intrinsic YTW of 2.885%.
- Incentives Dictate Behavior™ analysis highlights positive signals for creditors. Specifically, DAL’s compensation metrics should focus management on all three value drivers: asset efficiency, margins, and top-line growth, leading to Uniform ROA expansion and increased cash flows available to service obligations. Moreover, management has low change-in-control compensation, indicating they are not incentivized to pursue a sale or accept a buyout of the company, which combined with DAL’s size, limits event risk for creditors. In addition, most management members are material owners of DAL equity relative to their average annual compensation, indicating they may be well-aligned with shareholders for long-term value creation.
- Earnings Call Forensics™ of the firm’s Q4 2021 earnings call (1/13) highlights that management is confident they saw significant improvement in demand and pricing in each of their passenger segments and that they anticipate an equally rapid improvement in demand once U.S. COVID cases begin to decline. Furthermore, they are confident they have a good outline regarding the timeline for the recovery of international markets. In addition, management is also confident they saw strong growth in business travel and can successfully attract talent without unusual perks.