Qantas returns from junk-bond purgatory with Moody’s upgrade

Canberra / Bloomberg

Qantas Airways Ltd.’s credit rating has been upgraded by Moody’s Investors Service, ending the Australian carrier’s more than two-year spell as a junk-rated credit.
The Sydney-based airline was raised one level to Baa3 by Moody’s, which had stripped it of investment-grade status back in January 2014. The move by Moody’s, which now has a stable outlook on Qantas, rewards Chief Executive Officer Alan Joyce’s efforts to cut debt and return the firm to profitability. It follows a similar decision by Standard & Poor’s in November, which lifted its score to BBB- with a stable outlook.
Qantas last week posted a record first-half profit, helped by a plunge in fuel prices, and announced its second capital return in less than six months. Its situation has been bolstered by a cost-cutting initiative that’s so far saved about A$1.4 billion ($1 billion) out of a targeted A$2 billion, a collapse in global energy prices and a dialing back of competition with Virgin Australia Holdings Ltd.
The revised rating “is based on the significant reduction in leverage,” Moody’s analyst Ian Chitterer wrote in a report, citing the role of both lower fuel costs and Joyce’s program. “Our upgrade also reflects Qantas’ commitment to maintain a prudent and conservative financial framework that includes prioritizing return on invested capital and maintaining an optimum capital structure for growth and shareholder returns.”

CDS Decline
The cost of insuring Qantas debt with Credit Default Swaps (CDS) was 230 basis points at the end of last week, having declined from as much as 350 basis points in March 2014, according to CMA data. The company’s equity price rose 1.3 percent on Monday to A$3.92 in Sydney. At the height of its woes, the airline’s stock price fell to a record low of less than $1 a share.
“Moody’s decision to restore our investment grade rating is a reflection of hard work to get our balance sheet in good shape and to put the Qantas Group in a strong position,” Joyce said.

in a statement on Monday.
Qantas Airways Limited is the flag carrier airline of Australia and its largest airline by fleet size, international flights and international destinations. It is the third oldest airline in the world, after KLM and Avianca having been founded in November 1920; it began international passenger flights in May 1935.
Qantas has a 65% share of the Australian domestic market and carries 14.9% of all passengers travelling in and out of Australia. Its subsidiaries QantasLink and Jetconnect provide services within Australia and to New Zealand respectively, flying under the Qantas brand. Qantas also owns the low-cost airline Jetstar, which operates both domestic and international services, and holds stakes in a number of its sister airlines.