Retail investors now have three Qantas bonds to choose from. Here we highlight some considerations
Retail investors now have greater choice when investing in Qantas, with each of the 2020, 2021 and 2022 corporate bonds now available to all investors.
Qantas has been one of the major positive turnaround stories in the Australian corporate market. After a challenging period up to the first half of 2014 when its credit rating was downgraded to below investment grade, the company’s financial performance is back on track. The 1H15 result saw a return to profitability with an underlying profit before tax of $367m for 1H15, up from a $252m loss in 1H14. Further, the result overshot its own guidance for the half year. The company has highlighted than an improvement in credit metrics is a priority and is targeting a $1bn debt reduction by the end of FY15.
The improvement in Qantas’ credit performance can be seen in the bond yield chart below. Since June last year, Qantas bond yields have reduced by around 1.25%-1.50%, and the corresponding bond prices have risen. This is in part due to the market’s view that the credit risk has declined.
Source: FIIG Securities
Recently, the credit rating agency Moody’s improved Qantas’ rating outlook from stable to positive, indicating the company could regain its investment grade credit rating at some point in the future if it continues its positive momentum.
For retail investors who are deciding on which bond to choose from, the following considerations are relevant:
- The 2020 bond has the earliest maturity date and as such it is the least risky of the three Qantas bonds because it will need to be repaid first. The reduced risk also translates to a relatively lower return on the 2020 bond, which is indicatively offered at a yield to maturity of 4.98%
- The 2021 and 2022 bonds have later maturity dates and as such are riskier than the 2020 bond. Unlike the 2020 bond, both have coupon ‘step-up’ provisions in the event of a credit rating downgrade below current levels. The bonds are indicatively yielding 5.55% and 5.72% respectively for taking the longer dated exposure
Investors can also choose a combination of Qantas bonds in their portfolio. For example, a mix of the less risky 2020 bond and one of the higher returning 2021/22 bonds.
Please note pricing is indicative only and subject to change. Please contact your FIIG representative for more information on the Qantas bonds.