Lufthansa has secured its status as one of a handful of airlines worldwide with an investment grade credit rating following a €500mn hybrid-bond issue, Standard & Poor’s said.
Bloomberg/Frankfurt
Deutsche Lufthansa has secured its status as one of a handful of airlines worldwide with an investment grade credit rating following a €500mn ($556mn) hybrid-bond issue, Standard & Poor’s said.
The German carrier’s BBB- rank, one above junk, is safe for now after the sale of the bonds, which have a maturity of 60 years, causing them to be classed as closer to stocks, S&P said. It will count half of the bond’s value as equity, bolstering a key ratio according to which credit worthiness is assessed.
Lufthansa, facing a profit squeeze as competition heats up and it struggles to wring savings from staff, remains in an exclusive club of S&P investment-grade carriers, alongside Ryanair Holdings, Southwest Airlines Co, Alaska Air Group and Canada’s WestJet Airlines.
The company had risked a downgrade as pension liabilities surpassed 10bn euros in the first quarter, pushing its debt-to-equity ratio as low as 7.5%.
“Lufthansa demonstrates its commitment to the rating and it is definitely good for the credit quality of the company to see that the management delivers on what it has communicated,” S&P analyst Izabela Listowska said in an e-mailed response to questions from Bloomberg. “We have factored in that Lufthansa will take several creditor-friendly actions in 2015.”
The Cologne-based company’s deteriorating equity ratio had been an additional concern alongside a drive to sustain market share and fare levels amid increased competition from low-cost carriers in Europe and Gulf airlines on long-haul routes.
Moody’s Investors Service, which among airlines it covers ranks only Southwest and Air New Zealand as investment- grade worthy, said the hybrid sale isn’t enough to change its stance on Lufthansa. It rates the carrier Ba1, the top junk grade, though with a “positive” outlook assigned in May 2014.
“When it comes to our most important credit metrics, Lufthansa is not quite there yet,” analyst Sven Reinke said in an interview. ‘Even if it were, we’d like to see tangible progress on one of its biggest issues first: better aligning pilot pay and retirement benefits with market realities.’’
While Lufthansa is rightly seeking to become more competitive at the lower end of the market and upgrading its premium cabin product to compete with the likes of Dubai-based Emirates, Reinke said, the impact of positive developments and efficiency savings is being “eaten up by market dynamics.”
Fitch Ratings also classifies state-controlled Etihad Airways of Abu Dhabi as investment grade, with an A ranking, as well as Ryanair, Southwest and Alaska Air. That means that the three top ratings companies view only seven carriers worldwide as investment-worthy.
Among Lufthansa’s main rivals, British Airways rates BB at S&P and an equivalent Ba2 at Moody’s - the second-highest junk band. Air France-KLM Group isn’t covered by the main agencies.
