Many big and small companies have been affected by the social distancing and lockdown measures implemented on a global scale due to the COVID-19 pandemic. Perhaps none more so that Singapore Airlines (SIA), which has had to ground 185 of its 196 SIA, SilkAir and Scoot aircraft.
Even after the lockdowns are eased and companies start normal operations, airlines may continue to be impacted as demand for air travel and tourism may not increase at the same pace as other industries.
The Need For Cash Flow To Sustain Operations
Even before global lockdowns intensified, SIA announced in late March various cost-cutting measures, including cutting 96% of its passenger capacity, deferring upcoming aircraft deliveries and payments as well as reducing the remuneration of company directors and management (although we read that bonuses will continue to be paid in this very insightful Dr Wealth article).
In recent weeks, SIA has also come into the spotlight after announcing its $5.3 billion rights share issue and $3.5 billion Mandatory Convertible Bonds (MCBs) issue. In the same announcement, SIA also had a provision to issue a further $6.2 billion in rights MCBs, as well as noting it had secured a $4 billion bridge loan facility with DBS Bank.
No doubt, many investors would have already seen numerous headlines about SIA’s rights issue and ongoing operations. It’s mainly because this is not a straightforward affair, we hope to bring out five main things investors should know about SIA’s rights issues.
#1 There Are 2 Rights Issues In Question
As mentioned, SIA’s rights issue may be complicated to retail and even more experienced investors. First, there are two rights issues:
Issue of Rights Shares – Rights Shares will be issued at $3.00 each, on the basis of 3 Rights Shares for every 2 existing SIA Shares held at the Record Date. More than 1.7 billion Rights Shares will be issued, raising approximately $5.3 billion.
Issue of Rights MCBs – Rights MCBs will be issued in the denomination of $1.00, on the basis of 295 Rights MCBs for every 100 existing SIA Shares held at the Record Date. Up to $3.5 billion of Rights MCBs will be raised.
As an illustration, for an existing shareholder as at 5pm on 8 May 2020, who holds 1,000 shares is entitled to subscribe for 1,500 Rights Shares (for $4,500) and 2,950 Rights MCBs (for $2,950).
Should retail investors not take up their full allocations, Singapore-backed Temasek Holdings, which is also SIA’s largest shareholder, will procure any remaining balance of both issues.
# 2 What Are Renounceable Rights Issue?
If that’s not complicated enough, the Rights Shares and Rights MCBs are also renounceable. This means existing SIA shareholders can sell away all or part of their allocation on the open market if they do not want to pay for it.
SIA’s Rights Shares are trading under the name SIA R and code LRDR, while its Rights MCBs are trading under the name SIA MCB R and code GANR. Both existing and new SIA investors can also buy these renounceable Rights Shares and Rights MCB.
Key dates for the SIA Rights Issue:
- Trading for the Rights Shares and Rights MCBs open on 13 May 2020, 9 am
- Trading for the Rights Shares and Rights MCBs close on 21 May 2020, 5 pm
- Acceptance and payment for the Rights Shares and Rights MCBs start on 13 May 2020, 9 am
- Acceptance and payment for the Rights Shares and Rights MCBs end on 28 May 2020, 5 pm
- Expected issuance of Rights Shares and Rights MCBs on 5 June 2020
- Expected date of trading commencement of Rights Shares on 8 June 2020
- Expected date of trading commencement of Rights MCBs on 9 June 2020
Existing shareholders can also apply for excess Rights Shares and Rights MCBs. Existing shareholders who do not want to invest more in SIA or pay for the Rights Shares or Rights MCBs should still exercise their rights to sell their entitlements on the market.
Those who want to subscribe for their entitlements should make payment via ATMs, the Online Application Website via PayNow, or through CDP. Those holding SIA shares through their CPF Investment Account, Supplementary Retirement Scheme (SRS) account or custodian accounts, should approach their intermediary to subscribe.
#3 What Is The Theoretical Ex-Rights Price (TERP) Of The Rights Shares?
In essence, the theoretical ex-rights price (TERP) is a calculated number for the stock price for the company after taking into consideration the issuance of new rights shares in the company.
Due to the complicated nature of this Rights Issue, this question affected traders who may be even more experienced than us to suffer from major losses in the market. This happened after those who bought SIA 5xShort DLCs saw their value fall to zero after SIA shares surged more than 20% upon trading ex-rights. Societe Generale, the DLCs product issuer also offered these traders a goodwill payment of $0.30.
According to the SIA Offer Document, its TERP would be $4.40. However, this did not take into consideration the Rights MCBs. Going back to the above controversy, Societe Generale had priced the TERP at $3.71, after taking the Rights MCBs into consideration, which may have caught out the SIA 5xShort DLC investors and traders.
#4 The Rights Mandatory Convertible Bonds Do Not Pay Any Coupons
Even though many of us many associate regular coupon payments from bond issuance, SIA’s Rights MCBs do not pay any coupons. Instead, it will pay a yield of either 4.0% (if redeemed within the first 4 years), 5.0% (if redeemed within the next 3 years) and 6.0% (if redeemed within the final 3 years) compounded on a semi-annual basis, depending on when it decides to trigger a call on the rights.
However, any or all of the Rights MCBs not redeemed within its 10-year maturity period will be converted into SIA shares based on the Final Accreted Principal Amount and Conversion Price.
As an illustration, if the Rights MCBs are not redeemed within the 10 years, its Final Accreted Principal Amount will grow to $1,806.11, and Conversion Price will be $4.84 (a 10% premium to TERP). A holder of $1,000 worth of Rights MCBs will receive 373 SIA shares.
#5 What Will SIA Be Doing With The Funds?
A total of $8.8 billion will be raised with the two rights issues.
- $3.7 billion will be spent on operating cashflow, to fund fixed costs and other operating expenses incurred.
- $3.3 billion will be spent on capital expenditure, to be used for aircraft purchases and aircraft-related payments
- $1.8 billion will be spent on other fixed commitments, to service debt and other contractual payments.
Note that if the situation does not improve for SIA, the company will likely tap on a further $6.2 billion in Rights MCBs that can issue. Beyond this Rights MCBs, it can increase cash flow by taking more debt via its approved $4 billion bridge loan facility with DBS Bank and even through other debt facilities in future.
How Will This Impact Shareholders?
We may think that SIA is an extension of the brand of Singapore, which means it will not be allowed to fail. In fact, this has been explicitly stated by PM Lee Hsien Loong in his May Day 2020 Message on live television: “The government is determined that SIA will see through this crisis. SIA has always flown Singapore’s flag high all over the world, and made us proud. We will spare no effort to enable it to do so again.”
However, SIA not failing does not equate to shareholders coming out winners. As you can see, this cash-raising exercise comes from shareholders. Those unable to participate will get diluted and there is also little visibility as to whether things will get better. From where we stand, there seems to be a greater possibility of things getting worse before it gets better.
There is much uncertainty even after lockdowns ease, as we may be navigating a sharp recession. We may not be sure how the air travel industry may be affected as people’s attitudes towards tourism and travel may change in the short and long term.
On the other hand, SIA continuing to sustain operations mean that its employees continue to be retained and potentially even being paid a bonus when the company is undergoing such a big cash-raising undertaking from shareholders. As a national carrier, it makes perfect sense for SIA to continue retaining this workforce and position for growth regardless of when it comes, even if taxpayers have to foot the bill. As a shareholder, it may make less sense.
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