Qantas rating cut to junk as woes mount

Qantas faces a sharp rise in its borrowing costs after it suffered the ignominy of a downgrade in its all-important credit rating to junk status from investment grade.
By · 7 Dec 2013
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7 Dec 2013
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Qantas faces a sharp rise in its borrowing costs after it suffered the ignominy of a downgrade in its all-important credit rating to junk status from investment grade.

A day after it warned of a first-half loss of up to $300 million and axed at least 1000 jobs, Standard & Poor's cut Qantas to junk status - or BB+ with a negative outlook - due to it bleeding red ink and expectations that the "cyclical and structural" headwinds will persist.

It leaves US airline Southwest and Germany's Lufthansa as the only airlines that S&P rates investment grade.

The loss of its hard-fought investment-grade rating could push up Qantas's interest bill by more than $100 million a year. Most affected will be any future borrowings Qantas enters into.

Shares in Qantas sank 3 per cent to $1.03 on Friday in the wake of the downgrade, and analysts slashing their earnings expectations for the year. It takes Qantas's decline in market value since Thursday to more than $373 million.

The shares are now hovering just above an all-time low of 96c struck last year.

Prime Minister Tony Abbott also issued his strongest signal yet that the government is unlikely to offer financial support to the airline.

Mr Abbott said it was incumbent on Qantas as a private company to run itself effectively and "get its house in order", warning that any subsidy for the airline would open the doors to other companies wanting aid.

"In the end businesses have to operate profitably. And in the end they have to operate profitably because of their own decisions and from their own resources," he said.

The previous government had offered Qantas a "letter of comfort" in August to help ease growing unease among the ratings agencies. But that implicit support ended with the change of government in September.

The downgrade by S&P follows Moody's warning on Thursday night that it is considering reducing Qantas to junk.

A day after Qantas painted a dire picture of its outlook, chief financial officer Gareth Evans sought to assure investors that the company "retains balance-sheet strength and maximum flexibility". He emphasised that the downgrade was not unexpected and pointed to its deeper cost cutting and structural review.

His comments came as one of Qantas's largest shareholders, US-based Capital Group, notified the market that it had reduced its stake in the airline from just over 10 per cent to 9 per cent.

Analysts are now forecasting Qantas will post a pre-tax loss of up to $868 million for the full year. They also began assessing the assets Qantas was most likely to put up for sale as part of the structural review. An outcome of that will not be known until February at the earliest.

Deutsche Bank analysts estimated Qantas could raise $360 million from selling its freight business, about $300 million from relinquishing the long-term lease on the domestic terminal at Sydney Airport, and $54 million from its stake in travel company Helloworld.

Analysts favoured a sale of leases on terminals at four airports including Sydney and Melbourne to Qantas offloading its Frequent Flyer loyalty program, which is considered its crown jewel.

UBS analysts also said it would be difficult to find a willing minority investor for the Frequent Flyer division because the business relied on its majority owner.
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