Now that the verdict is out. Singapore Airlines (SIA) has decided to exercise the option to raise the S$6.2 billion Mandatory Convertible Bonds (MCBs) in June 2021. This option had been proposed and been agreed upon by the SIA shareholders held in an Extraordinary General Meeting (EGM) in April 2020.
With the benefit of a precedent sale that resulted in 96% of the MCBs underwritten by Temasek Holdings (TH), the second tranche MCB sale is likely to be a another non-event. Like the 1st tranche, most SIA shareholders would likely to give it a miss, leaving the bulk of the MCBs underwritten once again by TH. Assuming that the same percentage of the 2nd tranche underwritten by TH to be the same as the 1st tranche, we should expect TH to add slightly more than 2.06 billion to their original holding. In total, if all the MCBs are not redeemed at the 10th year, TH should hold about 77.25% (estimate) of all the total SIA shares. This quantity does not include additional shares issues that may held from time to time, eg, employment option schemes etc as well as other convertible bond issues.
Of course, the next question is how sure are we that the MCBs will not be redeemed? Based on the present commitments (see the planned allocation table below) that they have with the aircraft suppliers as well as their operating expenses, the probability of the MCB redemption at least for the next few years seems to be very low unless the interest rates dips further and SIA managed to secure another source of funding to redeem the MCBs. Given that SIA managed to defer the delivery of some aircraft in the pipeline, the cash crunch situation should ease somewhat. However, that alone is not the determining condition to be able to redeem the MCBs. What SIA needs is not just one or two years of good cash flows, but at least several continuous good years of good cash flow to be in a position to be able to redeem the MCBs at least partially. So, realistically the redemption, if any, can only happen 5 to 6 years down the road earliest. And if luck is not at their side, the MCBs may not be redeemed at all. Given that we need several conditions to be aligned favourably, it is possible that at least some or even all the MCBs would be converted to shares. In an eventuality that all the MCBs are converted to shares at the 10th year, the float quanity of shares would be increased to about 6.423b (approximately 5.5 times the quantity just before the Covid-19 pandemic). In this light, it is a saving grace for existing shareholders that Temasek Holdings (TH) is the majority shareholders of the shares and the MCB bonds. It is quite unlikely that TH would sell the shares or the MCBs to sabotage the security prices. The way it is, I think the stock price should stay quite range bound at this level or decline a bit, barring any unforeseen circumstance. Given that most MCBs are likely to be held by TH (I can be very wrong), it would certainly help to insulate their effect on the stock price.
In a relatively remote event that aviation sector turns out to be doing extremely well in June 2030, better than the pre-Covid-19 (a view that even the directors and top management of SIA seem not holding now), then TH will be laughing all the way to the bank. Of course, under such a circumstance, the shareholders are also not too unhappy even though they had ditched their MCBs, leaving TH to underwrite most of the MCBs At least, it removes the overhang on the stock price due to the MCBs.
If a SIA shareholder had 1,000 shares just before the pandemic, his additional financial commitment for Singapore airlines would be as follows, depending on whether he subscribe to the rights issue and the MCBs.
It is going to be a long-term commitment. As usual, do your own due diligence (DYODD).
Brennen has been investing in the stock market for 30 years. He trains occasionally and is a managing partner for BP Wealth Learning Centre. He is the instructor for two online courses on InvestingNote – Value Investing: The Essential Guide and Value Investing: The Ultimate Guide. He is also the author of the book – “Building Wealth Together Through Stocks” which is available in both soft and hardcopy.