Question

Imagine that you are an analyst who is in charge of evaluating a convertible bond issued by Alpha Airlines since last year. Last year, the price stock was increasing dramatically and at some point reached an all-time high but in recent months, it plummeted due to the coronavirus shutting down traveling.

What would you do differently in your analysis of the convertible bond position this year compared to last year? Explain why?

Answer 1

The prices of Airlines Companies have fallen drastically amid complete shutting down of their operations. Experts are expecting an impending recession and there is complete lack of demand.

As an analyst, I would be doing different things while determining the value of Airlines Company of convertible bonds-

1. I would be slashing down the growth projections for the company.

2. I would be probably skeptical about the cash flows of the company and reduce my past projections.

3. I would assign a high credit risk and default risk associated with the company.

4. There would be a few bad quarters as advances have been cancelled and lockdown is expected to be extended and no certainity for resumption of their operations.

5. There is an insolvency risk associated with the company as this company doesnot have cash flows for paying off the debt obligations.

I would significantly downgrade the company as this environment of uncertainty can last long impacting their operations for long term and conversion of bonds won't fetch much profits as future projections are not that good.