Date: May 21, 2020
First published in Straits Times on 21 May 2020
Many Singapore Airlines shareholders have approached the Securities Investors Association (Singapore), or Sias, seeking to clarify if they should subscribe to the upcoming rights issue.
While Sias is not in a position to provide advice as to whether a shareholder should subscribe or not, your investment in Singapore’s flag carrier deserves a detailed discussion. Correspondingly, should non-existing shareholders also subscribe to the rights issue?
1. What is the outlook for the airline industry?
The industry has been severely impacted by the pandemic but there are green shoots of recovery as countries look to reopen their borders.
Singapore, Australia, Canada, South Korea and New Zealand have committed to resuming essential cross-border travel by establishing guidelines and protocols to facilitate the flow of goods and services, as well as movement of people.
Singapore is in discussion with a few countries on the possibility of allowing essential travel in limited numbers and with safeguards.
2. What is the impact of Covid-19 on SIA?
Singapore Airlines has cut 96 per cent of its capacity until June 30. It saw a sharp fall in operating performance in the three months to March 31, which negated the growth in the first nine months of its financial year.
As a result, it posted a full-year net loss of $212 million – its first ever annual loss in its 48 years of operations.
SIA has taken decisive steps to contain costs and Sias understands that an internal task force is reviewing all aspects of the airline’s operations to drive further efficiencies across the business.
It is also important for the airline to maintain and strengthen the quintessential SIA qualities that have made it one of the world’s most successful carriers.
Therefore, it has embarked on this massive fund-raising exercise to meet its immediate requirements and longer-term needs. The key is not only to survive in the short term, but also to position itself strongly to capture opportunities that will emerge when travel demand resumes.
SIA has secured shareholder approval to raise up to $8.8 billion by issuing rights shares and rights mandatory convertible bonds (MCBs) now and to raise a further $6.2 billion through additional MCBs if the need arises within 15 months. Temasek, a majority shareholder of SIA, will backstop the balance of the issuances.
3. What does the SIA rights issue entail?
The issue is made up of two parts: the rights shares and rights MCBs.
The rights shares are straightforward. For each two SIA shares owned, a shareholder can subscribe to three rights shares at a subscription price of $3.
This price is a sharp 54 per cent discount to the last transacted price of $6.50 before the issue was announced and a 32 per cent discount to the theoretical ex-rights price (Terp) of $4.40. This takes into account the rights issue.
SIA shares closed at $3.70 on Tuesday, so the rights shares at $3 each still provide a discount to investors.
Shareholders could monetise their entitlements by renouncing or selling their rights entitlements on the open market. They can still sell the rights now, before 5pm today. It will not be possible after that point.
Other shareholders also have the opportunity to participate in the rights issue. The rights shares, which are traded, closed at 57 cents on Tuesday. With the rights shares priced at $3, the cost of acquisition would be $3.57. This provides an arbitrage opportunity as the SIA shares closed at $3.70 on Tuesday. However, investors will need to buy the rights by 5pm today to be entitled to subscribe to the rights shares.
The rights MCBs are priced at $1 each. You will receive 295 rights MCBs for every 100 SIA shares you own. The MCB is a zero coupon bond, meaning investors will not receive interest payments for the entire 10 years.
In exchange, they will receive a maturity amount that is higher than the principal amount. At maturity, bondholders will receive $1.80611 for every $1 in principal owned.
The MCBs are also callable, which means SIA has the option to redeem the MCBs before maturity, once every six months.
If SIA chooses to redeem the bonds before maturity, bondholders will get a cash payment depending on the redemption price at that time. The amount will depend on the year of redemption and will range from 4 per cent to 6 per cent.
If not redeemed by SIA, the rights MCBs will be mandatorily converted to shares at the initial conversion price of $4.84 at maturity. Whether this conversion price is fair will depend very much on the medium-to long-term outlook of the aviation market.
Investors who prefer not to take the risk of investing in equity may find bonds an alternative to participating in the SIA recovery. Shareholders can also trade their rights MCBs before 5pm today.
Many shareholders may deem the rights MCBs unattractive due to the lack of regular coupons, a typical feature of bonds. In fact, investors should instead consider the potential redemption yields of 4 per cent to 6 per cent a year, compounded annually, if these rights MCBs are redeemed by SIA before maturity in year 10.
However, investors must understand that holding the MCBs to maturity will mean the conversion to SIA shares.
4. What are the implications for SIA shareholders?
Shareholders would need to subscribe for both rights shares and rights MCBs to avoid dilution of their SIA stakes.
They can do one of the following: a) Sell their rights in the shares and MCBs by today but note that you would incur trading costs; b) Subscribe for the rights before May 28. You would need to pay for the shares at $3 each and $1 for each MCB in order to convert the rights to shares and bonds; and c) Do nothing, then the rights automatically expire on May 28 and investors will likely see some dilution to the value of their shareholdings.
Non-shareholders who believe in SIA’s prospects can buy these rights in the open market before 5pm today. There will no longer be any buying and selling of the nil-paid rights from tomorrow.
Shareholders can accept their rights shares or rights MCBs, or both – they can do so before 5pm on May 28 (9.30pm for ATM applications). They can also apply for excess rights shares or rights MCBs before this deadline.
Temasek, which owns about 55 per cent of the airline, has pledged to take up any remaining shares and bonds that are not subscribed.
The rights shares are expected to commence trading on June 8.
5. Can SIA collapse?
The Singapore Government has recognised SIA as a strategic asset and announced an aid package of $750 million to support the aviation sector. This will be used to pay local staff and provide rebates on some outgoings. It is clear that there is determination not to let SIA collapse.
Sias also interviewed SIA chief executive Goh Choon Phong. This can be found on the Sias website.
• The writer is David Gerald, founder, president and chief executive of the Securities Investors Association Singapore.