Airlines; pockets of value

Sentiment is weak and pockets of value are starting to emerge...first time this year for us ex. the FOY29 value view at issuance.

• IAG29s (Baa3/BBB-) at Z+133/B+176; we are not sure why it has been left this wide. We are biased to seeing it as the best on fundamentals on solid FCF expectations, sector leading yields (behind Ryanair) and diversification through budget carriers Iberia (20%) and Vueling (10%). Earnings tomorrow.

• AFFP28s (NR/BB+/BBB-) at Z+196/B+240; this is a tougher one to like (despite the width) given the Olympics will drag on Q3 results - that comes on the 7th of Nov. How much of it is already priced and how it emerges out of that is still unclear. Adding to that if supply comes (we would not rule out) before a recovery then we can add a 20-30bp NIC. Positive is spread carry (ex. funding costs) between now and then will give about 16bps of duration adjusted protection for spread moves - that's far from horrible.

• FOY29s (NR/BB+) at Z+234/B+276; this is not RV but a carry view. It's hard to find a govvie owned and rating uplifted co that gives this level of carry on <5Y risk. We like the mgmt's recent comments around BS (though no explicit deleveraging planned) and clear reporting - i.e. ES(G) positives. Issue with FOY is if AFFP widens it will likely be a floor on spreads - we flagged this recently when it traded 4bps through after weak AFFP earnings - it has since reversed to the normal +20bp discount.