Investing

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

This article appeared in Yield matters on 01 March 2016

  • Airline carried speculative-grade rating for more than 2 years
  • Move follows decision by S&P to return investment-grade rating

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, helped by the plunge in fuel prices, 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 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.”

Source: Bloomberg, Benjamin Purvis

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