Markets pencil in a Qantas deal on line of credit from the government

While the airline industry and politicians debate whether Qantas should get a helping hand from the government, financial markets are already treating it as a done deal.

Credit traders expect news that Qantas has secured a line of credit from the government when it announces its half-year results on Thursday.

The cost of insuring against a Qantas default within five years fell sharply on Wednesday morning on increased speculation that the airline, which lost its investment grade credit rating late last year, will secure a government guarantee.

The airline is expected to announce a range of measures to support its debt position as it releases its first-half earnings – such as job cuts, and terminal sales and lease backs. Qantas is also considering a float of its Frequent Flyer business.

Qantas’ credit default swap contracts are among the most actively traded in the Australian credit markets as they offer one of the few ways to get exposure to the airline industry.

On Wednesday, credit traders said the cost of insuring Qantas five-year debt contracts was quoted at 228 to 238 basis points, that is lower from Tuesday’s closing level of 256 basis points – a near 8 per cent fall, indicating a lower perceived risk in lending to the airline.

The change means the cost of insuring against a default of $10,000 of Qantas debt has fallen from $256 to about $235.

Last year, Qantas five-year spreads had traded at 200 basis points. But as the airline revealed it would post a first-half loss of $300 million, that spread surged to 270.

Despite reports the government would reluctantly support the airline through a debt guarantee, markets failed to respond as credit spreads traded in a range between 256 and 276 basis points.

But headlines that a debt guarantee was likely led to the sharp fall in debt spread on Wednesday morning.

Qantas Australian dollar bonds also performed strongly on Wednesday, with the spread on the airline’s $250 million 6.50 per cent bonds maturing in 2020 trading 15 basis points lower at 2.6 percentage points over the swap rate – or about 6.4 per cent.

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