After completing its first BB+ rated – what is called junk in the trade – bond issue of $300 million in Australia last month, Qantas is back for another $100 million according to market reports today.
Junk bonds are those issued by companies which don’t have an investment grade credit rating from one of the Credit Rating Agencies like Fitch, Moody’s or Standard and Poor’s. Typically the status of junk comes with a higher yield to investors as a pay off for the higher risk that no rating implies. This of course also means that the cost to the company is higher than would otherwise be the case.
Market sources told Business Insider that while the details hadn’t been formally announced it was understood that the details of the deal (via Bloomberg) would be as follows.
- Issuer: Qantas Airways
- Currency: Australian dollar
- Tenor: 7 years
- Maturity: June 2021
- Price Guidance: Swap + 385bps area
- Sale Manager: Deutsche Bank
The deal at a 3.85% margin over market interest rate might sound expensive but it is likely well below the cost of equity capital, and the interest is tax deductible, likely making it a good deal for Qantas.