Amongst other Governments, we also witnessed the French government set out certain green conditions in their $7bn bailout of Air France, including imposing a condition to slash domestic flights and significantly reducing their emissions per passenger-kilometre. Air France accepted these conditions and claimed that in any case these align with their strategic objectives. However, the knock-on effect of this politically motivated bailout is twofold. Firstly, we could witness other companies and sectors almost held to ransom by supporting governments to drive change that is aligned to their party objectives, and while this works from a green perspective we shall have to wait and see whether this spills over into more contentious government ideas. The second knock-on effect this has will be on the wider airport sector. Reducing domestic flights could have a meaningful impact on regional airports at a time when they are already under obvious pressure which in turn could require further or deeper government support.
A topic that we have frequently discussed in this forum is how banks’ appetite may change and how the effects of additional capital against existing positions will drive different behaviour going forward. As of this week, we now have first sight of how this is playing out as US and European banks are on track to book more than £50bn of impairments against their loan books in the first quarter of 2020. The headline numbers mask dramatically different approaches across the industry, raising questions about how rigorous some banks are being in assessing possible future losses. Among the biggest institutions, US banks have unsurprisingly been the first to take action — boosting their reserves for potential bad loans by 350 per cent from the first quarter last year to $25 billion — while European lenders have increased provisions by 269 per cent to about €16 billion. The full extent will become clear over the course of the coming week, when banks including France’s BNP Paribas, Dutch lender ING and Italy’s UniCredit report their earnings. HSBC was the most pessimistic in tone, taking a $3 billion initial provision and warning losses could reach $11 billion this year. HSBC is the UK’s biggest bank but has not been an active lender in the European infra market recently and can be perceived more as an Asian bank – that said, it still gives a potential view on the total impairments that banks will realise over the coming months.

The covid-19 crisis has seen a return to the days when the difference between German bond yields and some Southern European countries is greater than 250bps (see graph below). Ignoring the fact that this may demonstrate the market always distinguished between a “one European Zone” in terms of central support, it also brings to the forefront of how debt investors will look to price assets of the same credit quality but operating in different countries across Europe. Back in the sovereign crisis of the early part of the last decade, investors would in some instances look at relative value versus the sovereign bond instead of the spread over the Mid-swap rate which is more customary in normalised times. Some of our discussions in recent days with PP investors have seen this topic raised again and one that debt market advisors should be fully aligned to especially when looking at raising debt in perceived lower credit quality countries. For instance, the 7-year Milan bond currently trades at c. 210bps over mid-swap making fair value for a 10 year at c. 250bps (credit rating is Baa3). The 10-year Italian treasury bond is at 200bps. As a debt investor, do you see value in buying Milan airport at 250bps with the risks associated with that industry now or would you prefer 200bps and take the government risk – look at this another way, is 50bps premium sufficient for you to hold Milan risk over pure Sovereign risk (interestingly, airports were one of the few sectors traditionally that would successfully trade inside respective government risk as airport assets would demonstrate their more diverse risk profile due to being exposed to many economies around the world given the nature of international flights)? Finally, this brings us onto what this means for private markets. While private markets price and look at value in many different ways, the dynamic that we set out above is not lost on them and we, and the wider market, are expecting to have to face more discussions over the coming weeks on this topic. DC remains committed to assisting our clients through these interesting times