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How SIA Shareholders Walked Away From $37 million Worth Of Free Money

Stocks

Written by:

Jon

In my previous article, I have called for investors to take precautions and stay clear of both the Singapore Airlines (SIA) Rights and the Mandatory Convertible Bonds (MCB) issue. There were three main thrusts to my argument.

Firstly, airlines operate on notoriously bad economics and wafer thin margins. COVID19 has made the dynamics behind the airline business even worse. 

Secondly, the impossibly convoluted Rights and MCB issue are structured for Temasek to bail out/transfer money to SIA. There has been no attempt to explain the process and the nuances to retail investors. Investors who do not understand the risks should not to get involved. 

Finally, the deal ties in with our National Narrative of keeping the flag flying high and keeping the population employed. It benefits the management and staff of SIA more than the shareholders. Investors should not conflate SIA’s survival with shareholder success, or even hope to make a pretty penny out of this exercise. 

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On the 2nd of June, SIA made an announcement with regards to the outcome of the exercise. 

The Rights component was over-subscribed, with 2.1 billion applications for 1.7 billion shares available. Temasek will be taking up their full allotment of 985 million new shares. All in all, more than $5 billion has been raised from just the share issue alone. 

But what caught really our eye was the fact that 67 million rights shares were not taken up. They remained in the CDP account of retail investors island-wide. On the 28th May 2020 at 5pm, a silent cry went across the country as every single one of the 67 million rights expired worthless. 

At the last traded price of 55 cents, the rights would have been worth $37 million. In one fell swoop, retail investors have dumped $37 million dollars in perfectly good working condition into the aircraft toilet, pressed the blue button and flushed every single one of them into oblivion. 

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The Funfair is in Town 

Here is what the original deal looks like. 

For every 2 SIA shares in circulation, SIA will issue 3 Renounceable Rights. They are called Rights because each Right allows the holder to purchase an additional SIA share at a discounted price of $3. They are Renounceable because they can be traded on the stock exchange between 13th to 21st May. 

Think of these Rights as funfair tokens. Here is SIA saying to investors – Since you are our shareholder, here are some free tokens for you. We would love to see you at the funfair. The game at the fair is to buy more SIA shares at a discount. If you are not interested to play the game, by all means sell the tokens to your friends. Free Money! 

(It is technically not free money because by issuing shares at a discount, the current price will converge to that value and your current portfolio will take a hit. But that is a story for another day). 

Every investor holding SIA shares on the 5th May has been issued with the Rights. Investors used the rights to buy more SIA shares at $3 apiece. At the end of the subscription period on the 28th May, most of the funfair tokens were used up.

Most, except for 67 million of them. 

For these 67 million rights, the owners neither showed up to subscribe to additional shares, nor sold them off in the open market during the trading period. At the last traded price of 55 cents, these rights are worth $37 million. 

How could this have happened? Why would rational investors ever walk away from free money? Let us try to figure out how that happened. 

Do I even have SIA shares? 

Allow me to suggest yet another visualisation. Think of ourselves as gardeners. There is this little garden in our backyard. We spend our leisure time working on the garden, trimming the hedges and plucking out the weeds. We try to fill it up with the most beautiful flowers that are in season. We derive great satisfaction from seeing our flowers bloom. We become devastated when once in a decade, locusts descend on all gardens and destroy all the flowers. Few have the heart to start all over again. 

This garden is our investment portfolio. The complexity increases as the size of the garden increases. Concerns about drainage, irrigation, spacing between trees, plants getting enough nutrition and enough sunlight take centrestage. When that happens, it might be better to engage a professional gardener to help tend to the grounds. 

But most of us do not have that luxury. On the contrary, we look after our investment portfolios in our spare time. Investing in stocks and shares is not a full time job. We have a life beyond investing. 

Life happens in seasons. We finish school, begin working on our careers, start dating, get married, move house, have kids, switch jobs, tend to elderly parents.

At each period of time our focus is different. The focus consumes us. While we may say – I am going to spend 3 hours each week improving on my investment knowledge and tracking my portfolio, how many of us have the steely resolve to do so when there is a new addition to the family or in the middle of a crisis at work? 

Along the way, some gardeners may decide to pick up another hobby. They may find fishing more therapeutic or cycling healthier. The time they spend in the garden gets lesser and lesser. The garden gets overgrown with weeds. In time to come, the gardener may not even remember having grown carnations before. 

This could really be the case for SIA. The company was first listed on the SGX (then called the Stock Exchange of Singapore) in 1985. Over the past three and a half decade, many investors would have crossed path with the stock. Some of them could have forgotten about this flower they have planted decades ago. 

How then can investors avoid facing such issues? 

As with all endeavours, it is very important to know yourself. Know what you can achieve or cannot achieve. Know your strengths and weaknesses. Accept your limitations. 

If you are conscientious to a fault, if you are highly disciplined and you tend to see through all your projects, you will make a better investor over your lifetime than someone who highly passionate but hops from one set of interest to another. 

Investing takes time and effort. Your garden takes time to grow. For investors who tend to get distracted easily, my suggestion would be to not bother with individual stock picking. Invest in an Exchange Traded Fund instead. The STI ETF holds a basket of all the STI component stocks and is the perfect buy and hold instrument. 

In gardening parlance, it is the perfect artificial green wall. You get to enjoy the soothing greenery without having to weed and water. Most important of all, you will never forget to exercise or sell your rights when the situation calls for.  

A Drink called Avoidance 

The early 2000s were heady days for SIA shareholders. Except for dips in 2003 and 2008, the stock price has stayed buoyant. Against the backdrop of SIA launching the world’s first commercial A380 flight, the counter rallied and hit a historical high in 2007. Till now, it has yet to find the legs to mount another challenge. 

Imagine buying into SIA then. Your purchase price will be a tad below $20. From then on, the price has seen a slow and steady decline. 

Every time the stock rebounds, you have a good mind to sell and move on. Yet every time you hang on for just that bit longer in the hope that it will recover to close the gap between your purchase price. 

Or perhaps your instinct tells you that Singapore Airlines being the flag carrier will never be allowed to flounder and it is a matter of time before the stock price returns to its glory days once again. 

And every time you read about how the middle eastern carriers Emirates, Etihad and Qatar Airways have grown and how aggressively they are encroaching into our markets, and about how low cost carriers are changing the industry landscape, about how SIA is no longer cost competitive, a little part of you just want to wither and die. In time to come you do not even want to read about airlines and SIA.

Human beings seek pleasure and avoid pain. Avoidance coping, according to psychologists, refer to the process of choosing your behaviour to avoid or escape particular thoughts and feelings. 

If flying stresses us out, we avoid going near planes unless absolutely necessary. If throwing away our belongings brings about a sense of unease, we avoid spring cleaning and over the years allow the clutter to pile up at home. If work colleagues are unpleasant, we call in sick more often. If the task at hand is too daunting or we do not know where to begin, we avoid starting – we procrastinate. 

Unfortunately, these behaviour are maladaptive in nature. Over the long run, they do more harm than good. The more we procrastinate, the more overwhelming the task ahead of us appears. 

In our investing journey, it is very common to have some decisions that has gone awry. Not every stock we pick will be a winner. Disciplined investors follow a framework for making their investing decisions, and they re-evaluate their decision constantly. If the original rationale for purchasing a stock no longer holds water, disciplined investors will remove the weed from the garden and sell the stock without hesitation. 

An amateur investor on the other hand, might probably hold on to it hoping the price will rebound. Over the years, the garden will become overgrown with weed, and working on the garden becomes a greater chore and an unbearable pain. At that point, it becomes easier to avoid.

With a portfolio that is worth a fraction of the original investment, even logging into the trading account or picking up the phone to call your broker is a pain. 

If you are reading this on the cool comfort of your couch and thinking how silly it sounds, let me assure you that the avoidance is absolutely legit. Life is tough and we find solace in our own little ways. 

The Complexity of the Deal 

SIA was trying to achieve many things at once. The cash injection is of course crucial. If Temasek can just throw cash at the airline, it would. That would have made everyone’s lives easier. But the reality is, Temasek owns ‘only’ 56% of SIA. They have to come up with a structure that is palatable to the other shareholders as well. 

Had they raised the entire amount in shares alone, existing shareholders would be greatly diluted. The value of their portfolio would decrease significantly over night. On the flip side, a 100% bond offering would increase their gearing ratio and increased their cost of borrowing significantly. With neither option being perfect, they wisely took the middle road and went for a bit of each. 

Therein lies the problem. Our national carrier is being rescued by our Sovereign Wealth Fund. There is a rights share issue and another mandatory convertible bond issue. Many of SIA’s shareholders are mom and pop retail investors who has supported the airline over the years. The deal is complex at best and extremely convoluted at worst. Yet there was no attempt to convey the message to retail investors in plain English what the deal really is about. 

Even French investment bank SocGen, the issuer of a derivative called Daily Leverage Certificate (DLC) on SIA got their figures all mixed up. Traders cried foul after losing money and SocGen offered traders a ‘one-off goodwill payment’. I hope the irony is not lost on you. 

Financial Literacy is the key

If you are in Paris and you cannot speak French, you will have difficulty communicating. Yes, some of the locals may understand English. Yes, you will be able to use google translate. Yes, you can even use hand gestures or draw to communicate. 

But the reality is you will not be able to immense in the culture, try the most local of local cuisines, and discover the city’s more intimate secrets. The entire experience would be a radically different one. Being able to speak the language of the land is a great advantage. At the very least, it removes a lot of the stresses associated with the journey. 

We live in a capitalistic society. The language of our society is money. We cannot denounce the importance of being fluent in the language. 

Do not get me wrong. When I say speaking the “Language of Money”, I do not mean counting every spending penny, or spending every waking minute being obsessed with making and hoarding money. 

Rather, it is more important to understand basic monetary concepts such as compound interest, good debt vs bad debt, the importance of saving, budgeting and maintaining a healthy cash buffer against life’s contingencies. We need to pick up knowledge on how to plan our finances and protect ourselves against scams. The more savvy amongst us would do well to learn about basic accounting concepts and investing principles. 

No matter which station in life you are at, this language will ensure that you are able to navigate the monetary aspects of our society with ease. We have written about the importance of financial literacy over many years. You can read the articles here here and here

37 million reasons

COVID-19 is an unprecedented event. Never have we seen airlines worldwide grounding practically their entire fleet. Never have we seen them needing to raise so much money, so fast. 

On the other hand, this is definitely not the first time retail investors have left money on the table. It has happened before, and it will happen again. It could be due to a lack of information, ignorance or just plain avoidance. It is highly likely to be a combination of all these factors. 

Passive income is a myth and investing is hard work – anyone who is telling you otherwise is but selling you a dream. Let the SIA Rights issue be a wake-up call. 

If you do not hold SIA shares, congrats and I do hope you have enjoyed the drama from the sidelines. If you have been an SIA shareholder, I thank you for doing your part for the nation. On top of that, if you have exercised sold or exercised your rights, well done. 

If you have done neither, then do let this be a wake up call. If the dying cries of 37 million innocent dollars do not jolt you out of your slumber, I do not know what will. 

18 thoughts on “How SIA Shareholders Walked Away From $37 million Worth Of Free Money”

  1. Hello the mcb rights last traded price was 0.001 … Your information of 55cents is not correct. Please rectify. It makes no sense to sell when you don’t have even rights to cover the selling commission fee of $25.

    Reply
  2. Vielen Dank fuer Ihren Artikel.
    Wir halten SIA haben die Rechte zu 100% genutzt, die MCB zur Hälfte.

    Jenseits der wirtschaftlichen Lage waren wir immer äußerst zufrieden mit SIA und werden das voraussichtlich weiterhin sein.

    Hoffen wir das Beste….

    Reply
  3. As a shareholder of SIA, I am deeply disappointed that the directors of SIA did not subscribe to their rights MCB.
    How to respect them when they have no confidence in the firm they are running? All the board directors including Chairman Peter Seah and CEO Goh Choon Phong should be sacked

    Reply
  4. I didnt quite understand fully (luxury of time vs potential amount to lose if I did a wrong move) and thus this is my fall. But neither the MCB or the Rights shares happen to appear at my Vickers dashboard. However I do notice these appearing in my SGX CDP portfolio. The hardcopies to exercise and buy came to my non stay in residence address during Covid and worst at the last 2 hours of deadline before I discovered. it limited the time I had to make any conscious decision. But then I read your article before all this and you said if u ain’t sure don’t attempt to own it. So I didn’t literally and you didn’t quite mention how this will be handled for somebody who wants to get rid in the open market. Only to know it is part of the 37 million of free money. Which translates to abt 1200 SGD for me ( before trading suspended). Yes a rather small bump for an stock experimental newbie. Should I be checking why Vickers didn’t show these 2 stocks rights and mcbs in order for me to even do anything with it in the first place?

    Reply
  5. What are you talking? Arent the price did hit 4.50? Not profiting? Buying the right immediate profit of 1.50?

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  6. First the author tells readers not to buy and steer clear. Now an article saying those that heeded his advice not to buy foolishly flushed $37M down the toilet. Finally he blames it on the complex deal structure by SIA and on our lack of financial literacy. Since he is a finance writer and should know this well enough, shouldn’t he admit he screwed up his assessment in the first article and gave wrong advice?

    Reply
    • I think he meant that even for those who did not want to take part in this complex deal structure can sell off their allocated RIGHTS and at least earn back something rather than letting them expire worthless.

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    • I think you should re-read the article, you might have a different takeaway.

      If these are the only things you can derive after reading, you really should not be owning any shares.

      Reply
  7. 3.7% is the 67 mil of the 1778 mil rights issued. By all accounts this is an impressive achievement of the investment systems here in Singapore, unless we also support the young parents scolding the young student for not getting 100% in exam, for example. $37 mil can make headlines, but really in a less than perfect world, we can expect some to fall through the cracks.

    Reply
  8. Tell me if I am stupid. I thought this is like IPO of SIA. So if anyone wants to buy an airline this time when the owners are selling..
    So there are people selling and there are people buying..Who is gambling?

    Reply
  9. MCB $3.5 billion….
    Today 11/6… only 22 lot traded..( as at 4pm)

    Is it a joke..to have a counter SIA..( an Iconic airline)to be in such a dire state.

    I really cannot understand the maths here..

    Reply
  10. Some might have bought the shares previously using SRS, so if they had maxed out their yearly contribution, they will not be able to subscribe to the rights or bonds without liquidating their shareholding in other counters. It’s only normal that a portion of it gets wasted, just like spoilt votes in an election.

    Reply

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