Qantas Curve

By far the highest yielding investment-grade issuer out there, it is worth looking at the Qantas Curve again.

Moody’s has changed the outlook back to Stable for the first time in nearly two years and it is now firmly positioned in the Baa2 category. The travel outlook has changed significantly, and the operational challenges experienced over Easter only bode well for the coming 12 months – in fact a lead indicator for pent-up travel demand.

The Qantas 28s, 29s, and 30s are still all pricing at a 5.5% yield plus – which is wider than other BBB- names and amongst the widest on the Australian corporate bond BBB curve. Even the Qantas 26s at c.4.5% yield look fairly good value for those investors not wanting to take too much duration risk.

Chart 1. Investable Bonds

Source: Bloomberg

Based on consensus EBITDA for FY23 of around AUD3bn, net debt/EBITDA will be well within the threshold set for its rating of 2.5x at around 1.6x. The significant leverage reduction will result from its EBITDA normalising as domestic capacity increases during FY23 to over 100% of pre-pandemic levels. Over 95% of Australians over the age of 16 are fully vaccinated, domestic borders are open, and international borders continue to open.

Chart 2. Key Metrics

Source: Bloomberg

Qantas still has cash of AUD2.7bn and AUD1.6bn in undrawn committed facilities as well as AUD2.4bn in unencumbered assets – which could be used if needed.

Chart 3. Relative Value

Source: Bloomberg

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