IAG-Air Europa: EU Objections Imminent, Do Not See A Deal Block As Credit Negative

IAG (IAG LN); FT reporting that EU to set out objections to IAG's bid for Air Europa. Curve has tightened meaningfully since deal announced (COVID recovery dominating), we don’t see an EU block being credit negative.

• IAG agreed EUR400m takeover of Air Europa in Feb-23, having ditched an initial attempt to the buy the smaller Spanish rival in 2021. IAG’s Iberia is #1 airline in Spain, Air Europa is #3, we believe.
• Reuters reported on 16-Jan that IAG expected the EU to open a full investigation, which it subsequently did opening Phase 2 proceedings on 24-Jan, and that it would offer “remedies” as part of the Phase 2.
• The deal is only 5% of IAG’s market cap, so relatively small and the cash curve largely ignored the deal (using IAGLN 3 3/4 03/25/2029 as our barometer). Since that point, the curve has tightened meaningfully (and the equity has outperformed the BBG World Airlines Index marginally since Feb-23). Spreads are tightening again today; any EU block seems unlikely to be a credit negative of any magnitude, in our view.