The effect of Covid-19 on the global economy is unprecedented. Entire economies have ground to a standstill and many companies are in the fight for survival.
Hardest hit is the aviation industry. Legacy carriers such as Cathay Pacific, Emirates and Qantas have grounded planes and furloughed staff. Airlines all around the world are in hibernation mode, hunkering down for the cold winter hoping to emerge stronger when the virus clears and the new Spring arrives.
Our National Carrier is not spared. Hampered by the lack of a domestic routes, SIA is dependent on passenger traffic passing through Singapore as a transit hub. With countries closing imposing border controls, it has seen its passenger numbers dwindle to a trickle.
Immediate measures have been taken to reduce operating costs. This includes cutting 96% of their flights and instituting compulsory no pay leave and pay cuts across the board.
Even so, cash reserves are not sufficient. It has been speculated that SIA will need to raise cash, and raise very soon, to remain afloat. After a one day trading halt, Singapore Airlines announced yesterday evening that it will indeed be raising funds to tide it over this critical period.
The exercise has two basic components – A Renounceable Rights issue and a Mandatory Convertible Bonds issue (MCB) to entitled shareholders.
The following is summary of what you should know, laid out in simple English or refer to this post for a typical sequence of events during a renounceable rights issue exercise:
Renounceable rights issue
1)For existing shareholders:
- For every 2 SIA shares that you own, you can subscribe to 3 new shares at $3 per share
- The rights subscription period has yet to be finalised
- A new rights counter will be created and will trade on SGX. You are able to sell the right to other investors during rights trading period (trading period is also yet to be finalised)
2)For non-shareholders: If you would like to participate, you can
- Buy SIA shares now and subscribe to the rights.
- Purchase the rights directly from other investors during the rights trading period
Mandatory Convertible Bonds (MCB)
1)For existing shareholders:
- For every 100 SIA shares that you own, you can subscribe to 295 MCB
- The MCB is a 10-year zero coupon bond with a mandatory conversion to SIA shares at the end of 10th year
- Conversion calculation: every $1,000 invested will be converted to approximate 373 shares at the 10th year (Accreted Principal Amount of $1,806.11 at conversion price $4.84, do note that this is subject to changes)
- SIA has the right to redeem the bond every 6 months based on the redemption price table in the announcement.
- You may sell the MCB right to other investors during right trading period (yet to be finalised)
- You may buy SIA shares now and subscribe to the MCB rights if you want to participate in MCB rights issue
- You could also buy the MCB rights from other investors during rights trading period.
You will be able to subscribe to both the rights and the MCB via ATM machines.
All the rights are fully underwritten by Temasek. Temasek will subscribe to all the rights if they are not taken up by investors
What this really means for the retail investor.
1. SIA is safe – for now.
They have raised at least six months (potentially more with more cost cutting measures coming in) of operating expenses and have opened a credit line with DBS for $4B. Temasek has thrown its weight behind the carrier.
2. How much is SIA really worth?
If you are a retail investor who has entered a position into SIA in the recent weeks, your stake is being diluted right now.
You need to subscribe for all the rights to if you don’t want your holdings to be diluted.
The Theoretical Ex Rights Price (TERP) has been determined to be $4.40 per share. SIA today is trading in the $6 range.
You should expect the share price to go down after the rights are issued.
3. How much is SIA really really worth?
Price is what you pay, value is what you get. In this very unusual time, traditional valuation methods are of little use. The biggest determinant of the true value of SIA will be how long before they get all their planes up and flying again.
If COVID-19 clears up in a couple of months and it is back to Ops Normal in the summer, SIA shares will be worth a lot more than $4.40. If the situation does not improve, this will not be the only fund raising exercise they would have to conduct.
My personal views
I have no position in SIA shares and do not intend to accumulate SIA shares. If you are holding SIA shares, you can either sell your shares if you do not want to participate in any of the rights.
If you plan to hold, you should subscribe to the rights or sell the rights. This will prevent your holdings from being diluted.
In my opinion, the recovery of SIA share price may take a much longer time.
But if you are one for the country, subscribing for the rights and the bonds are beyond monetary return.
Please note that this is purely based on my personal views, you should do your own due diligence and thinking before making any investment decision.