Date: April 22, 2020
Introduction:
The Covid-19 pandemic has crippled airline operations worldwide. Now Singapore Airlines (SIA) is seeking to raise S$5.3 billion in new equity and S$3.5 billion via 10-year mandatory convertible bonds (MCBs). Its largest shareholder Temasek Holdings, has thrown its support to back the corporate action and has pledged to take up any remaining shares and bonds that are not subscribed. SIA is proposing a renounceable rights issue of new ordinary shares and mandatory convertible bonds to raise about S$8.8 billion.
With the circuit breaker conditions in place, shareholders can only participate in the proceedings via webcast and audio and voting is via proxy. In order for retail shareholders to make an informed decision on their voting, SIAS has drafted questions for SIA to address and publish before the EGM so that retail shareholders would stay updated.
Questions:
- Why is SIA raising such a large amount? How did you determine this amount?
- The rights issue may be dilutive for SIA shareholders and will significantly impact retail shareholders who do not have sufficient cash to subscribe for the rights. Why is SIA choosing to raise cash via its equity shareholders, instead of raising debt? Have you explored other means?
- The rationale of the rights issue was stated as to “strengthen the Company’s balance sheet and liquidity position” (page 28) and “to meet its ongoing financial commitments, weathering the severe disruption to global air travel caused by the COVID-19 pandemic” (page 28). However, a significant portion of the funds, 38% or S$3.3 billion, raised is for capital expenditure (page 29). Why is there such a large percentage of the funds raised committed to capital expenditure given the stated rationale of strengthening SIA’s cashflow and balance sheet? If the funds raised are purely for cashflow and balance sheet reasons, does SIA really need to proceed with such a sizeable rights issue given its substantial impact on share dilution and share price?
- How was the rights issue price of S$3.00 per share determined? Is the discount in line with market?
- Why did SIA propose to issue the MCBs, in addition to the rights shares? Why are there Rights MCBs and Additional MCBs? How are the terms different from each other?
- Conversion price of S$4.84 at maturity is at a 10% premium to TERP of S$4.40. With the added premium, rights holders will get less shares after conversion. What is the rationale for a premium and how was the 10% derived? Also wouldn’t it be cheaper for shareholders to buy the shares in the open market at TERP all things being equal? (page 16)
- Rights MCB can be redeemed at the option of SIA. If SIA calls the Rights, a yield to call of 4% per annum compounded on a semi-annual basis applies if the Rights are called within the first 4 years. The yield to call is 5% and 6% if the Rights are called within the 5th to 7th and 8th to 10th year respectively (pages 44 and 45). The final accreted principal amount at maturity date is $1.80611 (page 44). Therefore, if held to maturity, the implied yield is 6% per annum compounded semi-annually (page 44). The yield to call of 4% and 5% appear to be far lower than the implied yield of 6% if held to maturity. What are the reasons for the differences in yield?
- The net gearing assuming conversion of all the Rights MCB is calculated to be (0.23) i.e. negative gearing. (page 33). The net gearing assuming conversion of all Rights MCB and Additional MCB is calculated to be (0.40) i.e. also negative gearing (page 34). This is arguably too conservative and comes at the expense of lower share prices. Would SIA consider reducing the size of the Rights issue and issue some debt instead to make up the shortfall?
- Some retail shareholders may not be familiar with how MCBs work. Can SIA share any relevant data points or comparables in the market, or provide an illustration of how the MCBs will work, to allow shareholders to make an informed decision?
- EPS is expected to drop from 57.7 cents to 23.1 cents after the Rights issue but before conversion of all the Rights MCB and to 16.0 cents assuming conversion of all the Rights MCBs (page 34). This significant drop in the EPS will likely generate significant downward pressure on the share price. Given the ongoing COVID-19 pandemic and overall uncertainty in the business environment, how does SIA intend to beef up its operational performance in light of COVID-19?
- Given the existing circuit breaker and safe distancing measures, SIA will be conducting its EGM via a “live” webcast. However, this is a rather new concept and some shareholders might be unfamiliar with accessing the EGM through electronic means. What is SIA doing to ensure that the EGM remains accessible to all its shareholders?
- Given Temasek’s irrevocable undertaking to vote in favour of the transaction at the EGM, how will SIA ensure that the EGM procedure is fair to minority shareholders and that their concerns are addressed before they cast their votes?
- What is SIA’s assessment of the aviation industry outlook, given the current COVID-19 outbreak situation?
In the interest of transparency and keeping your retail shareholders informed, please publish this letter with your responses on your website and on SGXNet so that all investors would be updated.
David Gerald
President/CEO
SIAS
