Qantas Airways Offers First Junk-Rated Bonds in Australia

May 12, 2014 5:06 am ET

(Updates with final transaction details throughout.)

May 12 (Bloomberg) -- Qantas Airways Ltd. became the first junk-rated issuer to sell senior unsecured bonds in Australia, raising A$300 million ($281 million) via eight-year notes today.

The nation’s largest airline, which was stripped of its investment-grade rating amid losses, hired Deutsche Bank AG to arrange the sale, according to an e-mailed statement from the German lender. The 7.75 percent fixed-rate securities were priced to yield 400 basis points more than the swap rate, according to a regulatory statement from Qantas.

Qantas’s May 2022 note issue comes as it seeks to cut costs and increase cash amid a price war with Virgin Australia Holdings Ltd. It’s cutting 5,000 jobs and also weighing whether to sell a stake in its Frequent Flyer loyalty business. While unrated corporate issuers have sold high-yield debt in Australia before, Qantas’s transaction is the first senior unsecured issue from a company with a speculative-grade rating, data compiled by Bloomberg show.

Standard & Poor’s lowered Qantas’s senior unsecured debt issue rating in December to BB+, one level below investment grade, from BBB-. Moody’s Investors Service downgraded the carrier’s senior unsecured rating by two steps in January to Ba2, the second-highest junk-bond grade. Both have a negative outlook on the airline.

Bond Risk

Sydney-based Qantas has A$250 million of local-currency bonds outstanding which were sold in April and May last year before it had its investment-grade ratings removed. The 2020 notes yielded 323 basis points more than the swap rate as of 6:47 p.m. in Sydney, according to Bloomberg-compiled prices. They were priced at a 295 basis-point gap when first issued.

The cost of insuring Qantas’s debt against non-payment using credit-default swaps has also risen, touching 316.5 basis points on May 9 compared with 165 basis points a year earlier, according to CMA data.

Today’s transaction won’t affect the company’s overall debt position, Qantas said in a regulatory statement. Proceeds will be used to buy back $126 million of Qantas’s 6.05 percent notes due April 2016 from one investor and to repay other shorter term debt maturities, according to the statement.