Qantas Seeks Clear Air for Overhaul by Pushing Back Debt

Qantas Airways Ltd. is cutting the amount of unsecured debt it must repay within three years by 47 percent, buying itself time to focus on flying.

Australia’s largest airline is paying A$724 million ($677 million) of bonds and loans early this year after raising A$700 million via the nation’s first junk-rated domestic note sales. That means more than half of the company’s debt won’t come due until after 2019, leaving it freer to focus on an operational overhaul aimed at reversing losses as a key measure of ticket revenue is poised for its lowest level in 15 years.

The carrier, which has struggled to protect its local market share in a price war with Virgin Australia Holdings Ltd. and teamed up with Dubai-based airline Emirates to safeguard its international business, isn’t predicted to post an annual profit until 2016, according to a Bloomberg survey of analysts. Chief Executive Officer Alan Joyce is seeking to reshape the so-called Flying Kangaroo by cutting 5,000 jobs and slashing spending in a A$2 billion cost-reduction plan.

“The next couple of years are going to be very busy for Qantas and they’ve got a lot of restructuring to do,” Scott Rundell, Sydney-based chief credit strategist at Commonwealth Bank of Australia, said in a July 1 interview. “The last thing they want to do is have to worry about refinancing at the same time, accordingly they’re terming out their debt profile while markets are buoyant.”

Risk Soars

The cost of insuring Qantas debt soared as the airline’s troubles mounted late last year and into early 2014. Although lower than its March peak of 350 basis points, the five-year credit-default swaps remain more than double their level at the start of 2011 and were at 309 basis points yesterday, according to CMA prices.

While the measure dropped to a three-month low of 270 basis points June 19, it’s since climbed along with other airlines’ CDS globally as violence in Iraq pushed up oil prices. The cost of protecting the debt of British Airways’ parent International Consolidated Airlines Group SA rose 43 basis points in the second half of June, while contracts for German peer Deutsche Lufthansa AG advanced 16.

Virgin War

Qantas flagged a record first-half loss in December amid rising fuel costs and lower ticket prices as second-ranked Virgin sought to break the airline’s dominance in Australia. Brisbane-based Virgin has added flights, business-class seats and lounges to win more corporate accounts, a market where Qantas had a near-monopoly for a decade up to 2011.

Standard & Poor’s cut Qantas’s credit rating to BB+, one notch below investment grade, on Dec. 6 and the stock plunged the following week to its lowest since the government sold the company in 1995. Moody’s Investors Service made an equivalent downgrade in January, taking the airline’s score to Ba1. The share price has recovered 16 percent this year to A$1.27 at the close of trade today in Sydney. The company reports its full-year results on Aug. 28.

As well as job and spending cuts, the 93-year-old Australian icon is weighing a sale of its frequent-flier loyalty business, freezing pay increases until it returns to profit and selling or delaying delivery of more than 50 planes. The airline was rebuffed when it sought a government debt guarantee in March.

Ticket Prices

Qantas expects its overhaul to save A$2 billion by fiscal 2017 and generate positive free cash flow from 2015, according to a May 8 presentation. It’s forecast to record a A$740 million loss for 2013-14 and a full-year profit in 2015-2016, according to the median estimates of analysts in a Bloomberg survey.

Passenger yields, the amount of revenue generated per kilometer by each traveler and an indicator of ticket prices, were lower for the 11 months through May than for the comparable year earlier, according to a June 30 statement. The yield for fiscal 2013 was the lowest since 1999, data compiled by Bloomberg show.

The airline said June 12 that it would repay A$450 million of senior unsecured bank debt eight months early, having bought back $254 million of bonds due in April 2016. The bulk of the repayments are funded from notes issued in the last two months.

The issues are “helping us repay debt early, extend maturity beyond 2020 and move towards the broader goals of our accelerated transformation program,” Gareth Evans, Qantas’s chief financial officer, said in an e-mailed response to questions yesterday.

Junk Bonds

Qantas priced A$300 million of eight-year notes on May 12 at a yield 400 basis points more than the swap rate, and A$400 million of seven-year bonds at a 385-basis-point spread on June

4. The spread on the 7.75 percent 2022 notes was 383 basis points today, while the 7.5 percent 2021 securities were at a gap of 378, according to CBA prices.

“The decision to do two bonds with different tenors means Qantas can spread their maturity profile and reduce refinancing risk down the track,” Rod Everitt, the Sydney-based head of the Australian dollar debt syndicate at Deutsche Bank AG, which managed both bond sales, said in a phone interview yesterday. “Investors are comfortable with the credit and the yields that were on offer were attractive.”

A glut of central bank liquidity has helped fuel the performance of credit globally and squeezed spreads for both investment-grade and junk debt. The average yield on an index of speculative-quality notes fell to 343 basis points more than the swap rate yesterday from 494 a year earlier, Bank of America Merrill Lynch data show. The gauge fell as low as 334 basis points last month, a level unseen since October 2007.

Following its various sales and repayments, Qantas will have to repay A$831 million of unsecured debt by mid-2017, according to its June 12 statement. That compares with a total A$1.56 billion as of December. Including A$250 million of notes sold in 2013, the company now has A$950 million of unsecured bonds maturing after April 2020.

“Qantas doesn’t look likely to default in the near future,” CBA’s Rundell said. “So if you’re not sensitive to market volatility, then they’re not bad bonds to own, especially at a time when yields everywhere are low.”

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