Qantas has returned to the bond market for the first time after its investment grade credit rating was restored to raise $425 million of long-term debt.
The airline's higher credit rating allowed it to cut the cost of seven-year debt dramatically from 7.50 per cent to about 4.5 per cent, saving millions of dollars in interest payments.
On Thursday, Qantas raised $250 million of seven-year bonds in the Australian bond market, paying a margin of 2.58 percentage points over the bank rate, or 4.4625 per cent. That rate was well below the initial marketed guidance of 2.70 percentage points over the bank rate.
The airline also marketed a 10-year bond at a margin of 2.90 percentage points, taking advantage for demand for corporate debt. The 10-year issue was priced on Friday, as the airline raised $175 million at 2.80 percentage points over the bank rate, with a coupon of 4.75 per cent.
The raising was managed by ANZ, Deutsche Bank and HSBC.
The bond deal marked a dramatic change in fortunes for the airline that was downgraded to junk status by the major credit rating agencies – with Standard & Poor's stripping the investment grade rating in late 2013 with Moody's following in January 2014.
As Qantas' credit rating was cut to junk, executives from the airline lobbied for a government guarantee on its debt to allow it to manage its cost of funds. The airline also announced a $2 billion restructure and cut 5000 jobs.
Fortunes on rise
Since then the airlines fortunes have improved, which has been acknowledged by the rating agencies.
Standard & Poor's upgraded Qantas to BBB-minus in November 2015 while Moody's lifted the rating in February 2016.
This week's deal marks the first major raising by the airline since its ratings were restored. Qantas last raised money in Australian dollars back in 2014 after its credit rating had been cut to junk status by Standard & Poor's and Moody's.
The airline issued seven-year and eight-year bonds totalling $700 million in May and June of 2014, via Deutsche Bank, paying rates of 7.75 per cent and 7.50 per cent, or margins of 4 percentage points over the bank rate.
But as the airlines fortunes have turned around investors that bought those bonds reaped the benefits of falling interest rates and an improvement in Qantas' balance sheet. Qantas 2022 bonds trade at a 20 per cent value to face value while the 2021 bonds trade at a 15 per cent premium.
The ride has been even better for Qantas shareholders as the stock price has increased from $1 in early 2014 to $3.12, a 180 per cent gain.
The gains in the price of Qantas bonds are partly due to a decline in the credit risk premium of Qantas debt – from 4 percentage points to 2.70 percentage points, but also due to a decline in base interest rates, which has boosted the value of bonds paying high fixed rates.
