Singapore Airlines

(27-03-2020, 07:46 AM)¯|_(ツ)_/¯ Wrote: Rights to Mandatory Convertible Bond (MCB)

For those valuebuddies who wanted to read the actual announcement:
(click to read details)


Summary:
1. SIA shareholders is given a chance to buy/subscribe to rights to MCB.
2. For every 2 SIA shares, you're entitle to 3 rights (FOC).
3. You can use your rights to buy MCB.
4. You'll need to pay $3 for each MCB (if you choose to buy)
5. The C in MCB means convertible - meaning you can convert the MCB into SIA shares by paying a conversion fees.
6. The M in MCB means mandatory aka there is a 10 years waiting period. 
7. At end of 10 years, then MCB can and will be converted to SIA shares.
8. To convert, you will need to pay $4.84 for each shares (initially set and subject to changes).

So, assuming you pay $6.50 to buy a SIA shares just before it's suspended.
You are given free rights to buy MCB.
To buy MCB, you pay $3 each MCB.
With your MCB, at end of 10 years, you pay $4.84 to convert into 1 SIA shares.

In the announcement, there is another terminology which is important.
This is an estimation of SIA shares price after ex-rights:
TERP
The theoretical ex-rights price is the theoretical market price of each Share assuming the completion of the Rights Issue, 
and is calculated based on the last transacted price of the Shares on the Official List of the SGX-ST of S$6.50 on 25 March 2020, 
being the last trading day on which trades were done on the Shares prior to this announcement, 
and the number of Shares following the completion of the Rights Issue.

$4.40$

Each MCB is S$1.00 instead of S$3.00.
Each Right share is S$3.00.

(27-03-2020, 07:46 AM)¯|_(ツ)_/¯ Wrote: Rights to Mandatory Convertible Bond (MCB)

For those valuebuddies who wanted to read the actual announcement:
(click to read details)


Summary:
1. SIA shareholders is given a chance to buy/subscribe to rights to MCB.
2. For every 2 SIA shares, you're entitle to 3 rights (FOC).
3. You can use your rights to buy MCB.
4. You'll need to pay $3 for each MCB (if you choose to buy)
5. The C in MCB means convertible - meaning you can convert the MCB into SIA shares by paying a conversion fees.
6. The M in MCB means mandatory aka there is a 10 years waiting period. 
7. At end of 10 years, then MCB can and will be converted to SIA shares.
8. To convert, you will need to pay $4.84 for each shares (initially set and subject to changes).

So, assuming you pay $6.50 to buy a SIA shares just before it's suspended.
You are given free rights to buy MCB.
To buy MCB, you pay $3 each MCB.
With your MCB, at end of 10 years, you pay $4.84 to convert into 1 SIA shares.

In the announcement, there is another terminology which is important.
This is an estimation of SIA shares price after ex-rights:
TERP
The theoretical ex-rights price is the theoretical market price of each Share assuming the completion of the Rights Issue, 
and is calculated based on the last transacted price of the Shares on the Official List of the SGX-ST of S$6.50 on 25 March 2020, 
being the last trading day on which trades were done on the Shares prior to this announcement, 
and the number of Shares following the completion of the Rights Issue.

$4.40$

Where did you see the part about using rights to buy MCBs? Right shares and MCBs are different and separate?

I think there are some very important terms of the MCBs that readers here have to take note though they are not mentioned so far.

Redemption price - The Redemption Price has been calculated on the basis that the annual yield to call for the first 4 years from the date of issue of the Rights MCBs is 4% per annum, and the subsequent 3 years is 5% per annum and the subsequent 3 years is 6% per annum.

The Redemption is at the option of the issuer. This part is very important. What this basically means is that your gains are capped at the yields derived from the redemption price above. If your belief is that SIA will survive this and trade much higher than the $4.84 conversion price in ten years time, the company will basically just redeem the MCB either through cash generated or refinancing it out.

Mandatory Conversion at Maturity - Conversion is only done at maturity.

What all the above means from my point of view is that the conversion functionality is basically not value enhancing. I would look at the MCB as a straight debt. Personally I think the outcome will be either

1) all goes well and the MCBs gets redeemed after a few years,
2) all does not go well the airline goes belly up within the ten year period and you are holding onto unsecured debt
3) the airline survives and trundles along but never to reach back above $4.84 and you get mandatory converted to shares. For example, if shares were trading at $2.42 in ten years time, every $1 of your MCB will be worth $1 * 1.75351 * $2.42 / $4.84 = $0.876755.

Everyone would think 2) is unlikely with the government and Temasek supporting the company. So if you go for the MCB, you are basically opting to hold unsecured debt on a "blue chip" company at 4% - 6% yield for the next ten years, with the risk of getting converted to equity and if 3) happens, lose part of your initial principal.

In my opinion, I will not go for the 4-6% yield (even though its theoretically risk free and government backed) as being a zero coupon, you don't receive any cash at all and run the risk of losing all of it and perhaps even part of the principal you put in at the end of ten years. Your returns will basically be capped due to option to redeem by the issuer.

If i wanted exposure to the company, I would simply buy shares. That's my personal view. I am more an equity person than debt person. And the debt above runs the risk when equity value goes down. If I need to run the risk of the downside, might as well hold the risk to the upside as well.

Please feel free to comment or correct any of the above. We are all learning. Caveat Emptor.

(27-03-2020, 09:16 AM)lonewolf Wrote: My understanding is that the Rights and Rights MCBs are 2 separate components of the entire right issue exercise.

• Right Shares at $3.00 on the basis of three (3) Rights Shares for every two (2) existing ordinary shares to raise approximately S$5.3 billion
  
• Rights MCBs at $1.00 on the basis of 295 Rights MCBs for every 100 existing ordinary Share to raise approximately S$3.5 billion
  

The rights part is clear enough. For the MCB, i think the simplest way to understand it is:

1. I give SIA $1 for each MCB.

2. For the next 10yrs, i have no say in what happens (i.e. no put option to investor). I cannot go to SIA and demand redemption or conversion.

3. For the next 10yrs, SIA will decide if
   a. Every 6mths, if it wants to redeem and give me back $1 + X (where X increases over time as given in the annex)
   b. For the next 10yrs, it don't redeem. At maturity, it mandatorily converts $1 of my principal into shares with conversion price $4.84. There is no return of capital at maturity.

Another thing to note is that the 3.5bio MCB is just the first tranche. Another 6.2bio might be issued if approved by EGM

MCB is for Temasek to acquire higher stake yet retain the optionality to get whole company if SIA goes down.

Since it is capital heavy, it will be undersubscribed and Temasek will take up all MCB.

MCB not designed for minority shareholders.

(27-03-2020, 10:29 AM)AQ. Wrote: The rights part is clear enough. For the MCB, i think the simplest way to understand it is:

1. I give SIA $1 for each MCB.

2. For the next 10yrs, i have no say in what happens (i.e. no put option to investor). I cannot go to SIA and demand redemption or conversion.

3. For the next 10yrs, SIA will decide if
   a. Every 6mths, if it wants to redeem and give me back $1 + X (where X increases over time as given in the annex)
   b. For the next 10yrs, it don't redeem. At maturity, it mandatorily converts $1 of my principal into shares with conversion price $4.84. There is no return of capital at maturity.

Another thing to note is that the 3.5bio MCB is just the first tranche. Another 6.2bio might be issued if approved by EGM

Thank you for your explanation!

I think the use of the 'Mandatory' in MCB throws a curveball but on further reading, it seems that MCB is basically just a zero-coupon Convertible Bond with a Mandatory clause.

(27-03-2020, 10:37 AM)lonewolf Wrote: I think the use of the 'Mandatory' in MCB throws a curveball but on further reading, it seems that MCB is basically just a zero-coupon Convertible Bond with a Mandatory clause.

In a CB, the investor buys a 0 bond and a call option. So the investor is happy if coy does well albeit the coupons are normally lower.

In this case, for the first 9.5yrs of the MCB, if redeemed, u get a 4-6% p.a. coupon, dep when. Personally i think this sucks. In 2019, SIA issued a retail bond tranche paying 3.03%. The credit profile of SIA is MUCH worse than 2019, but the coupon is "only" 4-6%. In someways, u can say SIA is going bankrupt yet paying just 4-6%.

In yr 9.5, SIA will just need to look at what's happening. 
a. If shares > 4.84 massively, then obviously it redeems (investor dun get upside.)
b. shares are slightly >4.84, well then maybe it converts. makes no diff.
c. Shares below $4.84, then obvious convert.

As well, for the next 10yrs, if SIA shares go on a parabola i.e. start at 5, goes to 50 and back to 5 (maybe COVID-30 strikes and same thing happens), the ord share holder could sell at 50, but the MCB is just a bond (there might be some uplift due to better prospects but the correlation will not be 1)

So actually this MCB will behave very diff from a normal CB. An investor who sees the words CB and thinks "Oh, lower coupon but i get upside" is going to be very surprised eventually.

(27-03-2020, 10:53 AM)AQ. Wrote:

(27-03-2020, 10:37 AM)lonewolf Wrote: I think the use of the 'Mandatory' in MCB throws a curveball but on further reading, it seems that MCB is basically just a zero-coupon Convertible Bond with a Mandatory clause.

In a CB, the investor buys a 0 bond and a call option. So the investor is happy if coy does well albeit the coupons are normally lower.

In this case, for the first 9.5yrs of the MCB, if redeemed, u get a 4-6% p.a. coupon, dep when. Personally i think this sucks. In 2019, SIA issued a retail bond tranche paying 3.03%. The credit profile of SIA is MUCH worse than 2019, but the coupon is "only" 4-6%. In someways, u can say SIA is going bankrupt yet paying just 4-6%.

In yr 9.5, SIA will just need to look at what's happening. 
a. If shares > 4.84 massively, then obviously it redeems (investor dun get upside.)
b. shares are slightly >4.84, well then maybe it converts. makes no diff.
c. Shares below $4.84, then obvious convert.

As well, for the next 10yrs, if SIA shares go on a parabola i.e. start at 5, goes to 50 and back to 5 (maybe COVID-30 strikes and same thing happens), the ord share holder could sell at 50, but the MCB is just a bond (there might be some uplift due to better prospects but the correlation will not be 1)

So actually this MCB will behave very diff from a normal CB. An investor who sees the words CB and thinks "Oh, lower coupon but i get upside" is going to be very surprised eventually.

Don't really agree with your way of viewing it in terms of yield. All the while, there has been an implicit guarantee from the government to come to the rescue for SIA. So prior you are paid 3% yield for holding SIA debt (which is implied to be backed by the government/Temasek). Now you are paid 4-6% to be still backed by the government/Temasek. Risk profile is the same from that point of view regardless of how much worse the credit profile of SIA might seem.

The issue is with the mandatory conversion structure of this zero coupon bond. All that yield can go up in smoke in ten years time due to that construct as illustrated by my post earlier. That's the real pain point.

(27-03-2020, 06:25 AM)pianist Wrote: Add on to their existing around 6 billion debt, coupled with quarterly cash burn rate of around 1.5billion,total debt would balloon to well above 24billion,

They should really need look at their costs closely
The ultimate strategic asset remains to be Boeing, which entice airlines to keep upgrade  newer of planes frequently

As you say the quarterly cashflow in normal times is 1.5 billion. With a large number of the workforce on unpaid leave, and many of its flight staff paid primarily when they fly, the operating cashflow in these times will be even less. Albeit they still have to pay for ther expensive hedges.

I speculate that the cash raise is not purely for operating cashflow. It is to position SIA to acquire assets or entire airlines at firesale prices.

almost all (if not) national air carriers are owned/subsided by the countries' government... it's difficult to buy them over for long term... the governments of the day will decide as and when the best for the countries.