Making Financial Sense Of Singapore Airlines’s Massive Fundraising

Singapore Airlines (SGX: C6L) recently announced a massive round of fundraising. In all, Singapore’s national carrier is looking to raise S$15 billion. The first slice of the fundraising involves a S$5.3 billion rights shares issue, and a S$3.5 billion tranche of mandatory convertible bonds (MCBs).

Temasek Holdings is one of the Singapore government’s investment arms and the current major shareholder of Singapore Airlines (SIA) with a 55% stake. It has committed to mop up all the rights shares issue and MCBs that other SIA shareholders do not want.

My blogging partner Jeremy Chia published a wonderful article yesterday. He shared his thoughts on why he’s not interested in investing in SIA despite Temasek’s promise to provide up to S$15 billion in capital. I’m not here to share my thoughts on investing in SIA. Instead, I’m here to provide you with a factual breakdown of the numbers behind SIA’s rights shares issue and MCBs.

I recognise that SIA’s latest fundraising activity is complex, and there’s a lot of confusion about it. I want to help clear the air, to the best of my abilities. The Good Investors exists to demystify investing for you – so here I am!

Details of the rights shares issue of Singapore Airlines

Here are the important numbers concerning SIA’s rights shares issue:

• Total sum: S$5.3 billion.
• Number of rights shares to be issued: Up to 1.778 billion rights shares to be issued, on the basis of 3 rights shares for every 2 shares of SIA that currently exist. There are 1.185 billion SIA shares that exist right now.
• Price per rights share: S$3.00.
• Renounceable? Yes, this rights shares issue is renounceable, so you will get to trade the rights.
• Changes in SIA’s book value per share (BVPS) and earnings per share (EPS) because of the rights issue: As of 31 December 2019, SIA’s BVPS and trailing-12-months EPS were S$10.25 and S$0.67, respectively. After the rights shares issue, the BVPS will fall to around S$5.89 while the EPS will decline to S$0.27, assuming everything else stays constant.
• What you have to effectively pay for SIA’s shares: At the time of writing (11:20 am, 30 March 2020), SIA’s share price is S$5.82. If you subscribe for your full allotment of rights shares, you’re effectively paying a price of S$4.13 per share for SIA’s shares. The math works this way: Effective price per share = [S$5.82 + (S$3.00 x 1.5)] / 2.5.
• The effective valuations you’re getting: At an effective share price of S$4.13, SIA will have a price-to-book ratio of 0.7 and a price-to-earnings ratio of 15.

Details of the MCBs of Singapore Airlines

For the MCBs, do note that the total sum SIA is looking for is S$9.7 billion. But the current tranche involves just S$3.5 billion. The key financial numbers for the current tranche of MCBs are as follows:

• Total sum: S$3.5 billion.
• Number of rights MCBs to be issued: Up to S$3.5 billion, in the denomination of S$1.00 per rights MCB, on the basis of 295 rights MCBs for every 100 shares of SIA that currently exist. As mentioned earlier, there are 1.185 billion SIA shares that exist right now.
• Issue price per rights MCB: S$1.00, meaning you’ll pay S$1.00 to purchase each rights MCB.
• Renounceable? Yes, this rights MCB issue is renounceable, so you will get to trade the rights.
• Maturity date of MCB: 10 years from the date of issue of the rights MCBs.
• Conversion terms of MCB: SIA is obliged to convert the rights MCBs into SIA shares when the MCBs mature. The conversion price is S$4.84 per SIA share. When the MCBs are converted at the maturity date (10 years from the date of issue), every S$1,000 worth of the MCBs will “grow” to S$1,806.11. This S$1,806.11 will then be converted into SIA shares at a price of S$4.84 each, giving us 373 SIA shares. The math works this way: Number of shares obtained upon conversion = S$1,806.11 / S$4.84
• Redemption terms of the MCB: SIA has the right – but not the obligation – to redeem the MCBs every six months from the date of issue at a certain price, giving you a certain yield. If the MCBs have yet to be redeemed when we hit the 10-year mark from the date of issue, SIA is obliged to convert the MCBs into SIA shares, as mentioned earlier. The redemption prices and yields are given in the table below. Note that you cannot ask for the redemption – it is entirely up to SIA to decide.

• What you’re effectively paying for SIA’s shares under the MCB, assuming it is converted: As mentioned earlier, if the MCBs are converted, every S$1,000 in MCBs will be converted into 373 shares. This gives rise to an effective price of S$2.68 per SIA share under the MCB. The math works this way: Effective price paid = S$1,000 / 373 shares. 
• What you’re effectively paying for SIA’s shares, in all, under the MCB, assuming it is converted: But to get hold of the MCBs, you’ll have to own SIA shares. Every 100 shares has a full allotment of 295 rights MCBs. At the time of writing, SIA’s share price is S$5.82. This works out to an overall effective price of S$3.47 per share. Here’s the math: Overall effective price paid = ([100 x S$5.82) + (295 x S$2.68)] / (100 +295). 
• Circumstances where you’ll make money on the MCBs alone (ignoring what happens to your SIA stake): There are a few scenarios where you’ll make a profit: (1) SIA redeems the MCBs before they are converted; (2) SIA allows the MCBs to convert into shares 10 years later and SIA’s share price is significantly higher than S$2.68 at that point in time. To be clear, the price of S$2.68 is the price you’re effectively paying for SIA’s shares in the event of the MCBs’ conversion. If SIA’s share price is around S$2.68 at the point of conversion, it’s very likely you’ll be losing money on the MCBs;  if SIA’s share price is lower than S$2.68 at the point of conversion, you’ll be losing money on the MCBs.
• When is it beneficial for SIA to redeem the MCBs? Redemption of the MCBs will require SIA to fork out cash, which negatively impacts SIA’s financial health. On the other hand, the conversion of the MCBs does not require SIA to dole out any cash. So from this perspective, it’s beneficial for SIA to not redeem the MCBs at all. This is important to note for the MCB holders for cash-flow-planning purposes, since SIA could very well choose not to redeem the MCBs.

Other important points to note

Shareholders of Singapore Airlines can choose to participate in the company’s fundraising activity in one of the following ways:

1. Subscribe for both the rights issue and rights MCBs
2. Subscribe for just the rights issue but not the rights MCBs
3. Subscribe for the rights MCBs but not the rights issue
4. Do not subscribe for both the rights issue and rights MCBs

If you’re a Singapore Airlines shareholder and you choose the fourth option, you can still recover some capital by selling the rights issues and rights MCBs (both are renounceable, so the rights can be actively traded). But you will face massive dilution, since the airline’s share count will increase significantly.

I hope laying out all these numbers will help you – if you’re a Singapore Airlines shareholder or are interested in its shares and/or MCBs – to make a better-informed decision.

Disclaimer: The Good Investors is the personal investing blog of two simple guys who are passionate about educating Singaporeans about stock market investing. By using this Site, you specifically agree that none of the information provided constitutes financial, investment, or other professional advice. It is only intended to provide education. Speak with a professional before making important decisions about your money, your professional life, or even your personal life.