Corporate hybrids to benefit from Lufthansa’s allowance to pay coupons

Highlights:

• Earlier this year, the European Commission has amended its state aid framework, to allow temporarily banks to receive support to cover Covid-related losses without a burden-sharing scheme (coupon suspension on sub-debt or even bail-in). 
• In this temporary framework, non-financials remain subject to non-mandatory coupon suspension in case of state aid. In that respect, weakest names of the corporate hybrid space were under great scrutiny (Lufthansa with a state aid already in place).
• Discussing with Lufthansa, their state aid contract with the Economic Stabilization Fund (ESF) stipulates that they are not to pay any coupons which they are not obligated to pay. They did, however, clarify with the ESF that this wording is not intended to cover coupon payments on their hybrid bond. Hence despite the state aid received from the German government, they will be able to pay the coupon on their hybrid if they want to.
• Making corporate hybrids coupons safer than expected in cases of state-aid, we then view it as a further positive for the entire corporate hybrid space, especially the weakest name of the universe, reinforcing our strong preference for the asset class for 2021.