by
Elizabeth Moran | Jun 03, 2014
Last month, Qantas brought a new high yielding bond to the market. The May 2022 7.75% fixed rate bond provided a 1.25% premium over the 2020 bond issued last year. The issue was so successful, Qantas have bought a third bond to the market yesterday as a part of a $1bn medium term notes program. The new bond matures in seven years in 2021 and has a similar structure to the 2022 bond, with the same step up clauses.
In the case of a credit rating downgrade, both the new 2021 and the 2022 bonds step up by 25 basis points (bps) (25 basis points = 0.25 per cent) per notch per agency, with a maximum of 75bps per agency; so if both Standard and Poor’s and Moody’s downgraded the 2022 bond by a single notch, interest would step up by 50bps to a total of 8.25 per cent. The higher yield only remains for the duration of the downgrade. If the company regains its current rating the step up no longer applies.
This gives investors’ added protection for the possibility of a further credit rating downgrade. However, Qantas’ management will be working hard to try to avoid further deterioration and the implied increased cost to raise funds.
The 2021 bond is only available to investors in minimum parcels of $500,000.
Recent trading had seen wholesale investors switch out of the 2020 bond and into the 2022 bond given the higher yield and the step up clause, resulting in a spread contraction to 23bps (7.55% yield to maturity). The new 2021 bond with a 385bps spread over mid swap, may again see large holders of the 2022 switch some or all of their exposure given the shorter term to maturity.
To invest in Qantas bonds you need to contact a bond broker who will transact on your behalf. Minimum initial investment is from $10,000. Retail and wholesale investors can purchase the 2020 bond in $10,000 parcels. While the 2021 and 2022 bonds can only be accessed by wholesale investors in $500,000 and $10,000 minimum face value parcels respectively.
Please call your local dealer for more information.
Note: Prices accurate as at 3 June 2014 but subject to change