CORPORATESISSUER COMMENT 1 JULY 2015SOUTHWEST AIRLINES CO. (LUV)Moodys Senior Unsecured Rating Baa2Moodys Outlook RU RURBond-Implied Rating Baa1CDS-Implied Rating Baa2EDF-Implied Rating Baa2As of 6/30/2015ANALYST CONTACTSAllerton G. Smith 212-553-4058 Sr Dir-Sr Research Analyst allerton.smith@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research, Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products. For further detail, please see the last page.Market Signals ReviewSouthwest Airlines Co.: Two Market-Implied Ratings Descend, One Gains Altitude Over the last three months the CDS- and EDF'-implied ratings for Southwest Airlines declined while the bond-implied rating improved.FIGURE 1. SOUTHWEST AIRLINES: MOODYS AND MARKET-IMPLIED RATINGS, LAST 90 DAYS (DAILY DATA)Southwest Airlines bond-implied rating advanced to A3 for several days immediately after the rating was placed under review for possible upgrade on June 16, but has now retreated to Baa1, which is one notch above the Baa2 level of three months ago (Figure 1).MOODY'S ANALYTICS CORPORATES2 1 JULY 2015 MARKET SIGNALS REVIEW : SOUTHWEST AIRLINES CO.: TWO MARKET-IMPLIED RATINGS DESCEND, ONE GAINS ALTITUDEThe CDS-implied rating fell by one notch from Baa1 90 days ago, reaching the Ba2 level. This current observation is the lowest since October.The EDF'-implied rating has shown the most volatility over the last 90 days. It was Aa3 on April 1, 2015 and has since dipped by five notches to Baa2.According to our ratings gap-conditioned transition matrices, companies rated Ba2 with a bond-implied rating of Baa1 outperformed the broad market 29% of the time over the following 12 months, matched the markets performance 15% of the time, and underperformed the broad market 54% of the time.As shown in our three-month study, Figure 2, the bond-implied ratings gap was zero notches 90 days ago and recently moved up to +2 notches, but was unable to sustain that advance, retu...
