Ebola raises airline bond risk evoking SARS scare

The bond risk of ANA Holdings Inc. rose the most of any company in Japan as the spread of Ebola to two health workers in the U.S. rekindled memories of the SARS epidemic in 2002 and 2003.

The cost to insure the debt of the airline from non-payment jumped 30 basis points to 133 basis points in the five days to Oct. 17, its biggest weekly increase in two years, according to data provider CMA. Protection on United Airlines Inc. widened 46 in the same period to 348, the sharpest weekly advance since June 2012. The average of 12 global carriers was 284 basis points, CMA data show.

The World Health Organization said on Oct. 14 that West Africa faces as many as 10,000 new cases a week by December, raising concern airlines may be hit if the disease spreads internationally. Passenger traffic to Asia dropped 30 percent in the second quarter of 2003 when severe acute respiratory syndrome, a lung disease spread through the air, saw travelers avoid the worst affected regions.

"A large number of us are employed long enough to remember what happened in SARS," said Timothy Ross, the head of Asia- Pacific transport research at Credit Suisse Group AG in Singapore. "Were we to see Ebola mushroom to those sorts of proportions, then this is dire."

Ross said he's inclined now "to believe it's something of an overreaction by investors," though airline stocks in Asia may fall if an outbreak is reported in the region.

ANA's CDS declined 5.6 basis points to 127.4 yesterday, while United Airlines's retreated 1.4 basis points for its first drop in seven trading sessions.

Travel Worries

"The market is looking at the Ebola cases in the U.S. and that's raising worries about air travel," said Yusuke Ueda, a Tokyo-based credit analyst at Bank of America Merrill Lynch.

The Markit iTraxx Japan index of corporate credit-default swaps rose 8.2 basis points to 78.9 last week, CMA data show. Weak U.S. economic data and concern Ebola will spread soured sentiment, according to an SMBC Nikko Securities Inc. report dated Oct. 17.

The SARS outbreak infected about 8,100 people, killed 774 and reached more than two dozen countries, the WHO said. Ebola, which causes bleeding in internal organs, is in theory less contagious because it's contracted via direct contact with infected bodily fluids.

SARS Reaction

The Bloomberg Asia-Pacific Airlines Index dropped 10 percent in the first four months of 2003 as SARS spread, before rebounding the rest of the year. The gauge has slipped 2 percent this month.

Tokyo-based ANA's corporate bonds have so far shown little reaction to the Ebola news, as unprecedented Bank of Japan stimulus compresses yields.

The airline's 15 billion yen of 2026 notes sold Sept. 11, its longest debt in 15 years, traded at a yield premium of 35 basis points over yen swaps, seven basis points more than the issue spread, Bloomberg-compiled data show. A basis point is 0.01 percentage point.

The probability Japan's biggest airline won't be able to pay its debt in the coming 12 months has dropped to 0.094 percent from 0.14 percent at the end of last year, according to Bloomberg's default-risk model, which considers factors such as share prices, debt levels and interest costs.

Profit Rebound

ANA's profit rebounded in the quarter ended June 30, helped by international route expansion. It posted net income of 3.5 billion yen versus a year-earlier loss of 6.6 billion yen. The company forecasts an 86 percent increase in income to 35 billion yen in the year ending March 31, 2015, it said in a statement on July 30.

Japan's benchmark 10-year bond yield was at 0.48 percent, the lowest in the world after Switzerland. The yen has weakened 1.2 percent this year to 106.51 per dollar as of 4:37 p.m. in Tokyo.

Bruce Aylward, the WHO's assistant director-general, said on Oct. 14 that the number of confirmed Ebola cases has reached 8,914, with 4,447 deaths since the outbreak in West Africa. It's still expanding geographically in Guinea, Sierra Leone, Liberia, he said.

While there have been no reported cases in Japan or elsewhere in Asia, President Barack Obama and Japanese Prime Minister Shinzo Abe discussed cooperating to fight against the disease in a telephone call last week.

Little Risk

Japan's Health Ministry says on its website there's "almost no" chance of an outbreak of the disease in the country. The health ministry asked local governments and health care authorities on Oct. 3 to review existing procedures to deal with suspected cases.

United Airlines took Thomas Eric Duncan, who became the first Ebola patient to be diagnosed in the U.S., on the last two legs of a three-stage journey to Texas from Liberia last month. Duncan, who died Oct. 8, passed on the disease to two nurses including Amber Vinson, who helped care him at the Texas Health Presbyterian Hospital in Dallas.

ANA hasn't seen any drop in demand from Ebola, said Ryosei Nomura, a Tokyo-based spokesman for the company. The airline is making announcements on some overseas flight to ask passengers who have visited African countries affected by the disease to inform quarantine when disembarking, in line with government requests, he said.

"A week or so's containment of any spread of the virus particularly in the U.S., where people are looking for leadership, would dispel a lot of fears," Credit Suisse's Ross said.