Qantas was upgraded to an investment grade rating by S&P on 17 November 2015. Moody’s has now followed S&P and upgraded the Qantas rating to investment grade. With investment grade ratings from both rating agencies, now may be a good opportunity for longer term investors to take profits
The upgrade was widely expected by the market, resulting in a modest tightening of bond yields of around 10 basis points across the board.
Qantas has been a major beneficiary from the continued falls in oil prices over the past two years. Its record 1H16 underlying profit before tax of AUD921m included an AUD446m benefit from lower fuel prices. We expect the company will continue to perform strongly in a low oil price environment.
Following the upgrade, we expect limited further uplift in capital prices now that the company has reached its target of returning to an investment grade rating. Investors who bought into Qantas when its credit rating was sub investment grade have been rewarded with solid capital gains on their Qantas bond holdings.
For investors who bought into Qantas at the higher yields, now may be a good opportunity to take profit and reinvest their funds into higher yielding opportunities. In particular, now would be a good opportunity for investors with relatively large Qantas holdings to reduce their exposure and diversify their bond portfolio.
Some investment grade switch opportunities available to both wholesale and retail investors are set out below:
- Praeco 2020 fixed rate bond – 5.04% yield to maturity
- Adani 2020 fixed rate bond – 6.40% yield to maturity
- Sydney Airport 2020 inflation linked bond – 5.15% yield to maturity*
- Sydney Airport 2030 inflation linked bond – 5.82% yield to maturity*
- Australian Gas Networks 2025 inflation linked bond – 4.94% yield to maturity*
- Glencore 2019 fixed rate bond – 8.05% yield to maturity, wholesale only but with the same credit rating
Alternatively, for a return pick up investors can look to the unrated space where there are a large variety of bonds offering yields to maturity ranging from 6%-8.50%. Please contact your FIIG representative for a range of switch options.
Please contact your FIIG representative for further information and current pricing levels on the Qantas bonds. Available to retail and wholesale investors.
*Quoted yield assumes a 2.50% pa rate of inflation.