Buy SAS 2017 outright

What’s on our mind

- General credit market news

• In terms of iTraxx indices, this week is looking to close tighter than last week, despite an intra-week peak of 10bp higher. The increased volatility is in line with what happened for most risk assets as the rouble weakening intensified on Tuesday after the oil price reached a new recent record low.

• On Wednesday, we published our Credit outlook for 2015. Ín this year’s edition you will find, apart from 14 sector comments with updated valuation, a special section on the effects of the lower oil price on Nordic credits and an update on Nordic default rates. Top picks for the coming months were also identified (in order of increasing risk/reward) as TVO, Volvo hybrid '23, SEB CoCo and Nynas.

• Finally, we would like to wish all of you Happy Holidays and a Happy New Year, as this is our last Weekly Credit Update for the year. See you again in 2015.

BUY SAS 2017 outright

– Attractive absolute value – supported by adequate liquidity

• SAS has just released its Q4 13/14 report. Although it posted a result that was slightly worse than expected, we believe it was supportive from a credit perspective. This reflects the following:

• SAS has sufficient liquidity, in our view, to handle debt maturities to end-FY 2018. Cash and cash equivalents were SEK7.4bn at end-2013/14. Debt maturities to end- FY 2018 are around SEK6.6bn.

• Cash flow from operations was solid, with SEK0.8bn in Q4 13/14 and SEK1.1bn for FY 2013/14. With limited capex for the coming years (SEK1bn expected in 2014/15) and financing secured for most aircraft deliveries in 2015-17, we expect SAS to be free cash flow positive in the years to come – and to be able to maintain adequate liquidity.

• We believe the SAS 2017 offers an attractive absolute return. SAS AB is rated B-/S with adequate liquidity. Due to the significant amount of pledged assets, we estimate the bond rating at CCC+/CCC.

• SAS has hedged 43% of fuel consumption for the next 12 months. The positive impact is offset by a weaker SEK versus the USD but we estimate a positive net impact of SEK1-1.3bn for 2014/15. We expect the cost relief to support the bond valuation.

SELL ATCOA2019 2.625% – BUY ATCOA2023 2.500%

– The Atlas Copco 2019’s trade too tight for the rating, in our view

• The Atlas Copco 2019s trade tighter than the average ‘A+’ rated EUR corporate. We suggest going further out the curve and to buy the Atlas Copco 2023s to get more value out of a fairly tight name. Alternatively, investors can sell 5YR protection on Atlas Copco for an even greater pick-up relative to the cash curve.

• Atlas Copco has best-in-class low operational leverage as witnessed by its very strong margin protection in 2009.

• Atlas Copco is exposed to Oil & Gas E&P capex spending. However, since its exposure is fairly well distributed over the entire Oil & Gas E&P value chain, downside to new orders in 2015 as a result of the lower oil price should be fairly limited, in our view.

• Having added substantial amounts of debt to its balance sheet with the acquisition of Edwards group in 2014, we view the risk of large scale M&A as limited in Atlas Copco. Our base case is that Atlas Copco continues with smaller bolt-on acquisitions in the first half of 2015.

• Key risk for the case is, in our view, a further decline in demand from the Mining segment in 2015.