SIA Mandatory Convertible Bonds 2021: Should shareholders take up?

2021-05-24     drwealth
SIA Mandatory Convertible Bonds 2021: Should shareholders take up?

Singapore Airlines Limited (SIA) has announced its full-year financial results for FY20/21, along with a proposed issuance of the second tranche of Mandatory Convertible Bonds (Rights 2021 MCBs), which will raise approximately $6.2 billion in additional liquidity for the Company.

As there is quite a bit of information to take in, I hope this article would provide a good summary of SIA financial result and also highlight various details of the 2021 MCBs which SIA (SGX:C6L) is planning to issue.

SIA Financial Performance in 2020

COVID-19 has hit the aviation industry hard. With many airlines grounded, 2020 was one of the worst years that many airlines including SIA have experienced.

Income performance

SIA’s passenger traffic shrank 97.9% for FY20/21 compared to a year before.

While the increase in cargo revenue by $758 million (+38.8%) year-on-year to $2,709 million has partially offset the loss in revenue from its passenger segment, it was not enough. SIA’s revenue fell by $12,160 million (-76.1%) year-on-year to $3,816 million.

After accounting for various expenses such as staff salary, fuel hedging, maintenance, parking and depreciation, SIA’s net loss for FY20/21 came in at $4,271 million.

Cashflow and Balance Sheet

SIA’s cash and cash equivalents increased by $5.1 billion, rising to $7.8 billion at the end of its financial year. The rise in its cash and cash equivalents was mainly due to net cash provided by financing activities, an amount that worked out to be net $9.7 billion.

In total, SIA had raised $14.6 billion in capital for FY20/21 via the various ways as shown below.

You can find some information’s of SIA’s past capital raising here:

Likewise, total debt balances increased by $2.6 billion to $14.3 billion due to the drawdown of these new debt facilities.

Consequently, the Group’s debt to equity ratio fell from 1.27 times to 0.90 times. While a lower debt to equity ratio is better in general as it shows that a company is not overly leveraged, the reason for the drop in this case, was due to the increase in equity from the rights issue last year. As such this ratio should be taken with a pinch of salt.

How does SIA’s future look like?

SIA expects its passenger capacity to recover to 28% of pre-Covid levels by June 2021. And by July 2021, it expects this capacity to reach 32% of pre-Covid levels.

However, taking the recent outbreak of cases worldwide into context, these figures may have been too optimistic as international air travel is unlikely to return soon.

For now, SIA still depends heavily on its air cargo revenue and continues to be optimistic about the growing demand from e-commerce and pharmaceutical segments.

Albeit this cargo segment has been keeping SIA afloat (70% of total revenue came from cargo and mail segment currently), I do not think this is sufficient as this segment only makes up a small percentage of SIA pre-Covid revenue.

In fact, in FY19/20 SIA’s Cargo and Mail segment had only contributed 12.2% of their total revenue. Given the small percentage, no matter how much this increase, SIA will not be able to recover much if borders remain close.

Group Revenue FY19/20

Group Revenue FY20/21

SIA’s Mandatory convertible bonds (MCB) 2021

Back in April 2020, SIA went through an Extraordinary General Meeting that approved the issuance of new ordinary shares and mandatory convertible bonds to raise gross proceeds of approximately S$8.8 billion.

The proposal which was renewed at the recent Annual General Meeting on 27 July 2020, has also given SIA the flexibility to issue an additional MCBs of up to $6.2 billion within 15 months of the EGM by way of one or more rights issues.

With this, SIA has now decided to issue the second tranche of MCB following the announcement on 19 May 2021.

Why are they raising funds now?

Net cash outflow from operating and investing activities stood at $4.6 billion for the year 2020. At this rate, with a cash and cash equivalents of $7.8 billion, SIA could scrape through 2 more years before it is out of cash.

An SIA spokesman has said that current capital expenditure and cash burn is below $150 million a month compared to $350 million six months ago. With this figure, the $7.8 billion can last SIA for about 4 years, double the previous estimate.

However, 4 years is still too short a runway, given that the aviation industry is not expected to recover till pre-covid level or 2024 as forecasted by IATA.

To add on, SIA has also mentioned that this issuance would help strengthen its balance sheet and provide the resources to position the company for growth as it rebounds from the pandemic.

These may be the reasons why SIA has decided to undertake a further issuance of additional mandatory convertible bonds now.

Key Details of SIA’s 2021 MCB issue

  • Issue Size

Up to $6.2 billion (approximately)

  • Allotment Ratio

For every 100 existing ordinary shares held, you will be entitled to 209 rights 2021 MCBs. You do not need to pay for the rights. They would be automatically deposited into your CDP or custodian accounts.

  • Issue Price at $1.00

This means that you need to pay $1 per rights 2021 MCB to convert the rights into bonds.

  • Maturity Date

8 June 2030, approximately 9 years from the date of issuance. In addition, SIA has the options to redeem these MCBs early every 6 months. Your yield will thereby range between 4% to 6% annualised, depending on the year of redemption. The closer to the maturity, the higher the yield.

  • Zero-coupon

The MCBs are zero-coupon bonds which means you will not receive interest payments yearly. Instead, you will receive one lump sum in cash (if redeemed before maturity) or in shares (if redeemed at maturity). The maturity amount at the end of 9 years+ is equivalent to $1.69797 for every $1 in principal amount.

  • Mandatory Conversion

If it is not redeemed, upon maturity, the bonds will be converted to SIA ordinary shares at a conversion price of $4.84 per share. This number represents a premium of 3% to $4.70 the last transacted price before the announcement and is subjected to adjustment. There will be no cash paid too as in the case of early redemption.

  • Renounceable rights

The rights MCBs are tradable on SGX. You can buy and sell them like a normal stock. If you don’t want to exercise the rights, you should sell them off (if there is any value left in them). If you want to buy more bonds, you can also buy more rights and exercise them later.

Nevertheless, Temasek, SIA’s largest shareholder has provided an undertaking to subscribe to its pro-rata entitlement. They will also take up any remaining balance of this issuance.

Should Shareholders Take Up SIA’s MCBs?

Here I’ll share two potential outcomes for the MCBs and your potential returns in each case.

Case 1: SIA decides to redeem the MCB early

If this is done within the first four years of the issue date (i.e. 8th Semi-Annual Date or earlier) you can expect an annualised return of 4.0% compounded on a semi-annual basis.

If it is within the fifth to seventh year of the issue date (i.e. between 9th to 14th Semi-Annual Date, both inclusive) you can expect an annualised return of 5% compounded on a semi-annual basis.

Lastly, for the eighth year and ninth year of issue date onwards (i.e. between 15th to 19th Semi-Annual Date, both inclusive) you can expect an annualised return of 6% compounded on a semi-annual basis.

This table is taken from April 2020 circular for the 2020 MCBs. The numbers remain the same except that the 2021 MCBs will reach maturity on year 9th instead.

As such, if SIA chooses to redeem the MCBs on the 9th Semi-Annual Date, investors can expect to receive $1248.66 in cash for every $1000 they have in MCBs.

Case 2: MCBs has not been redeem up till maturity

Upon maturity, the rights MCBs will be converted to SIA ordinary shares at the price of $4.84 per share. No cash will be given. Assuming a principal amount of $1000:

  • Final accreted principal amount = $1000 * (1 + 0.06/2) ^ 18 = $1697.97 (estimated)
  • Number of ordinary shares converted = $1697.97/$4.84 = 350 shares (rounded down as fractional entitlements will be disregarded)

Alvin has shared a breakdown of SIA’s 2021 MCB issue in a video too:

*** Please note: There is an error in the video about the MCB redemption price at maturity. It should be S$1.69797 instead of $1. If you have 1,000 MCBs, the redemption would be worth $1,697.97 at maturity. The number of SIA shares would be $1,697.97/$4.84 = 351 shares***

Indicative Timeline you should note

Key Milestones Date
Share’s trade ex-Rights (You need to own SIA share prior to this date to be eligible for the MCBs) Thursday, 27 May 2021 from 9.00 a.m.
Dissemination of the Offer Information Statement and product highlights sheet Wednesday, 2 June 2021
Commencement of trading of Rights Wednesday, 2 June 2021 (9.00 a.m. for Electronic Applications through ATMs of Participating Banks or Accepted Electronic Service i.e PayNow)
Last date and time for splitting and trading of Rights Thursday, 10 June 2021 at 5.00 p.m.
Last date and time for acceptance of and payment for Rights 2021 MCBs and/or applications and payment for excess Rights 2021 MCBs Wednesday, 16 June 2021 at 5.00 p.m. for applications made through CDP or the Share Registrar
Wednesday, 16 June 2021 at 9.30 p.m. for Electronic Applications through ATMs of the Participating Banks or Accepted Electronic Service i.e PayNow
Expected date of issuance of Rights 2021 MCBs Thursday, 24 June 2021
Expected date of commencement of trading of Rights 2021 MCBs Friday, 25 June 2021

If you are holding SIA shares in a custodian account, your broker may have a different deadline. So do contact your broker and take note of the timings.

How will this MCB issue impact SIA’s share value

There will not be an immediate dilution arising from the additional MCBs.

They will only be converted to ordinary shares, if they had not been redeemed prior to the maturity date on 8 June 2030.

Even if the MCBs are redeemed early, it will not be dilutive as these redemptions will be paid in cash instead of SIA shares. In this case, we can view MCBs as a loan from shareholders. Nonetheless, we should consider its dilutive effect as shown below, should SIA not redeem it up till maturity.

Source: FSMone

SIA MCB FAQ (More can be found here)

Q: I have SIA shares in my SRS account, what do I need to do?

Your agent bank which holds your shares in custody should inform you about your rights MCBs. You have to follow their instructions to exercise them.

If my SIA shares are held under CPFIS, can I buy the Rights MCBs using my CPF fund?

Yes, you can use CPF to fund the rights purchase, provided your CPF limit allows.

Q: What prices should the rights MCBs trade at?

Price of the Rights MCBs should trade close to $0.

Q: Do we need to pay $4.84 for a MCB in order to convert it to a SIA share in 10 years’ time (8 June 2030 to be precise)?

No need to pay. They will just give you the shares in exchange for the bonds.

Concluding thoughts

With this, I hope you have a clearer picture of SIA performance and also simplified the additional MCBs details.

For those that are considering to invest in SIA, here are some financial data over the past 5 years.

In my opinion, SIA is a source of national pride and one that I will keep flying with. However, I feel that the aviation industry is too competitive, which has resulted in a low-profit margin for SIA. As such I would avoid such companies for now.

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