Date: May 27, 2021
To: The Board of SIA
Through: The Chief Executive
Mr. Goh Choon Phong
SIA announced its intention to issue an additional S$6.2 billion of mandatory convertible bonds (MCBs), which according to the announcement allows it to navigate the prolonged COVID-19 uncertainty, and to support its future growth.
Following the tepid response to the previous fundraising through MCB issuance, shareholders are questioning, inter alia, the intention of SIA and this MCB issuance, and are not sure what they should do.
In this regard, having considered the concerns of SIA shareholders, SIAS would like the Board to address the following questions.
- Regarding your intentions to exercise the rights MCB issue of S$6.2 billion, in a bid to strengthen the group’s financial foundation and secure its industry-leading position, how critical is this issuance for SIA as a group, over the near- and longer-term?
- The response to the last MCB issuance was tepid, where Temasek ended up holding c. 96% of the MCB issued (despite of its 55.4% shareholdings). This signifies that most investors as well as directors chose to lapse their rights MCB. Many believe that the MCB has a suboptimal return-risk profile – where it provides no income, and with a paltry payoff of 4-6% per annum upon redemption after some years.
- What were the lessons learnt from the previous MCB exercise, and what is done differently this time round?
- Can SIA share the merits of the MCB issuance, and why eligible shareholders should take up this offer?
- On the technicalities and the mathematical aspects, are there any differences between the MCBs issued in 2020 and those eligible shareholders are entitled to this time round, i.e. Rights 2021 MCBs?
- We note that this MCB issuance was approved by shareholders during an EGM held on 30 April 2020, with a 15-month timeframe from the date of the EGM. What factors influenced SIA in making the decision to go for this MCB issuance? Are these more of circumstantial or structural factors?
- According to the announcement, of the S$6.2 billion to be raised, 32% will be used for operating purposes; the remaining 44% and 24% will be used for CAPEX and other commitments, respectively. This marks a departure from last year, where respective allocations stood at 42%, 38% and 20%. Plain reading of these figures suggests the shift in SIA’s focus – where it is looking beyond this pandemic to secure its longer-term future. Can SIA comment on the thought process behind the allocation of funds? Also, can SIA briefly outline the deployment schedule for the proceeds?
- The issuance of MCB will be treated as equity in the group’s balance sheet. On paper, the expansion of the equity base reduces gearing and leverage ratios – even though debt levels effectively remain the same, i.e. creditworthiness still stays the same. Moreover, this MCB issuance opens up further debt headroom for SIA.
- Is there an optimal capital structure that SIA is looking at?
- Does SIA have sufficient operating cash flow and/or free cash flow to service its existing interest payments – bearing in mind freight operations is the major contributor currently?
SIA’s Strategy and Outlook
- It was announced that SIA expects passenger capacity to be around 28% and 32% of pre-COVID levels by June and July, respectively. Assuming this is the base case, what is the worst case scenario assumed by SIA? What would be the impact to SIA’s operating performance as well as its financial position under such scenario?
- As the adage goes, the only certainty is uncertainty. Such uncertainty is evident in SIA’s Offer Information Statement lodged for MCB 2020, where it is noted that “there is no assurance that travel will rebound to pre-outbreak levels”. Furthermore, the changes to the travel and aviation industry remain to be seen – it could possibly come to the point of lower passenger load factor and lesser business travels. What are the steps taken or to be taken by SIA to mitigate these risks and uncertainties?
- Notwithstanding the different industries, we have seen large, established heavyweights in the Singapore economy making strategic changes and/or conducting strategic review on its asset composition (e.g. Keppel, Sembcorp, CapitaLand, and SPH). Most of them are targeted at streamlining its asset base, to one that is “asset-light”. Seeing the success in its recent sale-and-leaseback programme that raised S$2 billion, would this be an avenue to which SIA can achieve dual goals of raising fund and streamlining its asset base? Could you elaborate?
- It was reported that SIA has managed to slash its monthly cash burn rate to the range of S$100-150 million, from S$350 million a year ago. How long will this S$6.2 billion raised last? Would there be a need for further fund-raising?
- As far as shareholders are concerned: they operate with finite amount of resources and expect a commensurate payoff when the dust settles.
- Some shareholders have asked whether SIA is considering privatisation and/or delisting (e.g. SMRT)? Has SIA any such plan?
- How does SIA look to balance/align its business interests and that of the shareholders?
- Notwithstanding that the dilution of shareholdings will only take place sometime later, i.e. upon conversion of MCB, were there other less-dilutive fund-raising means considered as well?
- Has the risk profile of SIA changed, following the corporate actions?
President and CEO