IAG's Credit Upgrade Signals a Dual-Play Opportunity in Debt and Equity Markets

The recent upgrade of IAG's credit outlook to “positive” by Moody's Ratings marks a pivotal moment for the airline giant. This shift, driven by structural improvements in financial discipline and operational resilience, creates a rare dual-play opportunity for investors: a chance to capitalize on both debt and equity markets. Let's dissect why IAG's transformation matters now and how investors can benefit.

The Credit Turnaround: Why Moody's Saw Value

Moody's affirmed IAG's Baa3 rating but upgraded its outlook to “positive” in June 2025, signaling confidence in the company's ability to sustain credit metrics at levels that could support a future upgrade. Key drivers include:

1. Debt Reduction: IAG's gross debt/EBITDA ratio dropped to 2.2x in March 2025, down from 2.6x a year earlier, thanks to over €1 billion in debt repayments.
2. Profitability Gains: Moody's-adjusted operating profit hit €4.2 billion (13% margin) in the 12 months ending March 2025, with forecasts of €4 billion for 2025 despite rising non-fuel costs.
3. Liquidity Strength: €12.4 billion in liquidity (30% of annual revenue) provides a buffer against macroeconomic headwinds.

Equity Valuation: A Confluence of Tailwinds

While S&P and Fitch maintained stable outlooks, Moody's positive view underscores IAG's strategic progress. For equity investors, this creates a compelling case:

• Balance Sheet Improvement: Lower leverage reduces refinancing risks and opens avenues for shareholder returns (e.g., dividends or buybacks).
• Operating Leverage: A global network and cost discipline position IAG to capture rising demand post-pandemic. Leisure travel's resilience and premium pricing power in business routes are key growth levers.
• Multiple Expansion: At a P/E of ~8x (vs. historical averages of 12-15x in expansion phases), IAG's stock appears undervalued relative to peers.

The Dual-Play Opportunity

Investors can now target two fronts:
1. Debt Market: IAG's bonds may see narrowing credit spreads as the positive outlook reduces perceived risk. High-yield debt instruments could offer attractive yields while benefiting from credit upgrades.
2. Equity Market: A potential rerating of the stock is likely if operating margins expand further or the credit rating improves.

Risks, but Manageable

Operational disruptions (e.g., strikes, supply chain hiccups) or sudden cost inflation remain risks. However, IAG's liquidity and scale mitigate these concerns. A downgrade would require gross debt/EBITDA to exceed 2.3x—a scenario unlikely given current trends.

Investment Thesis

IAG's credit upgrade is more than a ratings call—it's a validation of its transformation. For income-focused investors, its debt instruments offer a “sweet spot” between yield and safety. For growth investors, the equity's valuation discount and structural tailwinds suggest asymmetric upside.

Bottom Line: IAG's journey from pandemic survivor to credit story is now a dual-play catalyst. Investors should consider both its bonds for income and its equity for growth, as the company positions itself to capitalize on a resilient travel market. This is a rare moment where both debt and equity investors can align behind a single, compelling narrative.