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Qantas Credit Risk Soars as Leveraged Buyout Threatens Ratings
Ngọc, Q1, 0909600409
By John Glover and Patricia Kuo
Nov. 22 (Bloomberg) -- The risk of owning Qantas Airways Ltd. debt jumped today after Australia's biggest airline received a takeover approach from Macquarie Bank Ltd. and Texas Pacific Group, according to traders betting on the creditworthiness of companies in the credit-default swap market.
Contracts based on $10 million of Qantas bonds rose to $53,500 from $30,500 yesterday, according to prices from JPMorgan Chase & Co. Credit-default swaps are financial instruments based on corporate bonds and loans that are used to speculate on an increase or decrease in indebtedness.
``This is a wake-up call to the credit market that those companies which appear safe are not as safe as we assumed,'' said Stephen Miller, who helps manage $1.5 billion of credit at Blackrock Investment Management (Australia) Ltd. in Sydney. ``There had been some drumbeats about companies wanting to take a stake in Qantas, but investors had ignored it because they thought Qantas is safe from an LBO.''
Investors are concerned Sydney-based Macquarie and U.S. private equity firm Texas Pacific will load Qantas with debt to fund the acquisition. Standard & Poor's said it may cut the company's investment-grade debt rating to high-yield, high-risk because a leveraged buyout would lead to a ``significant weakening'' in the company's credit quality.
An increase in the cost of credit-default swap contracts based on Qantas's $1.2 billion of bonds indicates a deterioration in credit quality.
Investors who buy the securities, sold by financial firms such as New York-based JPMorgan Chase & Co. and Frankfurt-based Deutsche Bank AG, are paid $10 million in exchange for the notes should the company fail to adhere to debt agreements during the next five years.
Deal `Conditional'
Macquarie, Australia's biggest investment bank, said the proposed deal is ``conditional upon the support of the Qantas board.'' Qantas shares jumped 15 percent, valuing the airline at $7.6 billion.
Qantas's bonds don't have covenants protecting holders against a change of ownership or increased leverage, S&P said. The company's $1.47 billion of bank loans are protected from an LBO, the ratings firm said.
``When these private equity people come in, they traditionally leverage up these businesses,'' said Jeanette Ward, a Melbourne-based analyst with S&P. ``If Qantas were to become much more highly leveraged then, yes, there is the potential that they could fall out of investment grade.''
Ratings Review
Moody's Investors Service said it would review its ratings on Qantas for a possible downgrade if a bid is made.
Qantas's bonds are rated BBB+ by S&P, three levels above non-investment grade, and an equivalent Baa1 at Moody's. High- yield, high-risk bonds are rated below Baa3 at Moody's and BBB- at S&P.
The yield premium, or spread, investors demand to hold Qantas's $450 million of 5.125 percent bonds due 2013, rather than government debt of similar maturity, soared to 118 basis points today from 97 basis points yesterday, according to BNP Paribas SA. The spread is now the widest since the end of July.
A basis point is 0.01 percentage point.
Qantas, which operates 213 planes making 5,000 domestic and 700 international flights a week, has avoided the worst of the airline industry's woes, reporting a profit every year since 1994, including record earnings in 2004 and 2005. The company is part of a duopoly in the domestic market, where discount carrier Virgin Blue Holdings Ltd. is the only competitor with a national network.
The approach is ``incomplete and is being investigated,'' Qantas said in a statement. Edna Hedstrom, a Melbourne-based spokeswoman for Texas Pacific, declined to comment.
Credit Quality
Credit-default swaps are the fastest growing market for derivatives, financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in the weather or interest rates.
The perception of European credit quality as measured by the iTraxx Crossover Index improved today. A credit-default swap based on a 10 million-euro ($12.8 million) contract on the index, which includes 45 companies with investment-grade and non-investment grade ratings, fell to 236,167 euros, or 0.43 percent, from 237,188 euros yesterday, according to data compiled by JPMorgan. The index moves an average of about 1.5 percent a day.