Virgin Australia tapped it 8.50% November 2019 bonds a month ago, adding USD$100 million to the $300 million issued in November 2014. Now Citi’s credit analyst Anthony Ip thinks they are an attractive proposition for wholesale investors, as the bonds are the highest-yielding airline bonds available globally.
At an implied yield of 8.2% Ip thinks a more appropriate yield for the sub-investment grade bonds should be around 7.2%. He said Virgin’s balance sheet was improving and the 7.75% April 2021 bonds of Air Canada, another sub-investment grade issuer, are trading at a yield of around 6.7%.
While he thinks the airline is largely financially self-sufficient, a sale in the future of the all or part of the remaining 65% of its Velocity Frequent Flyer business would provide comfort to bond holders should cash flows decline. In 2014 it received $336 million for selling a 35 per cent stake to private equity house Affinity Equity Partners. Virgin Australia has a B+ credit rating from Standard & Poor’s and is rated B2 by Moody’s and its major shareholders are Air New Zealand, Etihad Airways, Singapore Airlines and the Virgin Group.