American credit market outlook

Bombardier Inc is a credit the market loves to hate but it may make sense to buy it as a long-term investment given the company's tailwinds, an analyst said. The Montreal-based plane and train maker said on Friday that the Canadian, Quebec and British governments will provide $700 million to help build a new jet. The company still needs commitments from customers and suppliers for the program. But the 110- to 130-seat jets Bombardier is looking to build will allow the company to compete more effectively against Brazil's Embraer, which makes the over-100 person regional jets that airlines seem to favour.
Bombardier customers like Delta Air Lines Inc are struggling to avoid bankruptcy as fuel prices stay high, but even in bankruptcy the companies are likely to continue buying planes that are crucial for their business, said Thomas Eggenschwiler, analyst at Aladdin Capital in Stamford, which has exposure similar to owning Bombardier bonds.
Meanwhile, Bombardier's other main business is building railroad cars, which long term should be profitable as roads globally become increasingly clogged and rail becomes a preferred means of transport, Eggenschwiler said.
That means it may make sense to sell credit default protection on Bombardier Inc or Bombardier Capital. Because the credit markets are broadly suffering now, it may also make sense to hedge the position by buying protection on the CDX high-volatility index, Eggenschwiler said.
But even if the position makes sense in the long term, there could be some volatility in the near term. After Standard & Poor's cut Ford Motor Co and General Motors Corp to junk last week, investors are reluctant to buy credits that have been punished recently.
The airline industry is suffering now because of high fuel prices and overcapacity, which could cut into the company's earnings.
The cost of protecting Bombardier Inc's debt against default for five years was 520 basis points, or $520,000 a year for every $10 million of principal protected. That's up from 510 basis points on Thursday.