State-aid framework under Covid: what impact on credit markets?

Highlights:

• Through the great financial crisis, taxpayers had to bail-out companies – mostly in the financial sector – with creditors ending up largely unscathed. To prevent a repeat of such situation, bail-in mechanism were put into place both by financial regulators and the European Commission (EC) via the competition framework both for financial and nonfinancial companies.
• Containing economic destruction has been a key priority of public authorities since the start of the Covid-19 crisis, to protect the chance of a post-lockdown recovery. State aid rules have been eased to simplify government support.
• Credit markets have mostly benefited for this temporary framework, as the burden sharing principle is mostly suspended – clearly a positive for markets. However coupons restrictions on corporate hybrids may arise for companies applying for long-term aid like Lufthansa. We nonetheless keep our positive stance on corporate hybrid.

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