Friday, 27 March 2020

Temasek shows up for SIA with a fair deal for stakeholders

So we saw a strong showing in the Resilience Budget yesterday, and this unyielding effort is further seen in what has to be nothing short of a massive show of support by Temasek in Singapore Airlines. 

I was closing out my minor US trading positions early this morning when I saw the press release on CNA, and subsequently went through the SGX announcement. Please do point out and pardon me if there are any factual errors in my summary below. 

Key Transaction Highlights - Singapore Airlines Rights Issue and Convertible Bond Issuance
* Total immediate new funding of S$8.8bn, comprising S$5.3bn equity and S$3.5bn 10 year mandatory convertible CB.
* Another S$6.2bn of dry powder in the form of a similar mandatory convertible CB to be on standby
* All new funding to be fully backstopped by Temasek

Rights Issue – S$3.5bn
* 3 Rights Shares (at S$3.00 issue price) for every 2 existing SIA Shares, existing shareholders diluted to 40% of original shareholding if choose not to subscribe to Rights Shares
* Rights Shares to raise proceeds of c. S$5.3bn
* Theoretical Ex-Rights Price (“TERP”) of S$4.40 per share
* Discount to TERP of 31.8%
* Discount to Last Traded Price of 53.8%

Convertible Bond – S$3.5bn in immediate funds, with another S$6.2bn of “dry powder”
* Additional 10-year zero-coupon Convertible Bond (“MCB”) to be issued, notional of S$3.5bn, at 295 MCBs for 100 existing SIA shares, denominated at S$1.00 per MCB (but trading lot size of S$1,000)
* Conversion Price at MCB set at 10% premium to TERP – S$4.84, convertible only at Maturity at Accreted Principal Amounts (“ACP”)
* ACP of MCB:
- 4% p.a. within first 4 years of issuance
- 5% p.a. in next 3 years (year 5 to 7)
- 6% p.a. in subsequent 3 years (year 8 to 10)
- All amounts compounded on a semi-annual basis
* Issuer has call option on MCBs subject to payment of Accreted Principal Amounts, only to be exercised semi-annually from issuance of MCB
* No put option on MCBs for investors
* Issuer seeking approval for another S$6.2bn of MCB (at substantially similar terms) to be made available for issuance within 15 months from EGM approval date 

Potential Shareholding Dilution for Minorities – limited to only effects from this corporate action
* If you choose not to subscribe, on immediate completion of Rights Issue, you retain 40.0% your original ownership
* Post completion of Rights Issue and if new S$3.5bn MCB is converted in 10 years, you retain 28.0% your original ownership
* If a further S$6.2bn MCB is converted in 10 years, you retain 18.3% your original ownership

My thoughts

Whenever my friends and I talk about single stock investing in the Singapore landscape, the conversation invariably involves our esteemed sovereign wealth funds (GIC and Temasek), and somehow, someone will always come up with the idea that if you’re lazy, or at a loss of what to do, besides investing in index trackers, maybe you can just mirror what Temasek / GIC does. After all, given the intertwining of the business landscape between GLCs, Government and SWFs in Singapore, even if you get fucked, you won’t get fucked so bad. There’ll likely be some reprieve and most likely a decent ongoing yield.

While I have my own reservations on the investing methodology as described in the above paragraph, there is no doubt at all that the situation with Singapore Airlines epitomizes the above thinking. Look, I know bad is relative, at least your investment in Singapore Airlines won’t go to a big fat donut – congratulations you just got bailed out.

Temasek is certainly pushing out the boat here – backstopping S$15bn of funding for Singapore Airlines, but of course, there is no doubt that Singapore Airlines is a critical strategic asset that cannot afford to fail. If this fails, there is a high probability that our entire aviation sector will collapse like a house of cards. Just think about it – T4 was pretty much empty even before COVID began, and remember all the ancillary services that generates revenue from the servicing of aircraft, catering, etc? I’m not quite sure they can survive if the anchor tenant of Changi is gone.  

Now that we have answered the existentialist question of “to save or not to save”, the question is – what can Temasek do to provide a lifeline that will not make for bad optics (i.e. fucking existing minority shareholders, being called out by the public for spending inefficiently or in excess, etc)?

They could call for a general offer to take private Singapore Airlines. The upside is that no more having to deal with quarterly updates, answering to the public on why this why that, ease of doing more strategic moves, etc. But then there will be other issues like what acquisition premium to give, decrease of depth in an already thinly traded market, perceptions, etc.

They could do a direct primary share issuance with Singapore Airlines, or a convertible bond, but that would mean fucking over the minorities, especially long term existing shareholders who will no doubt be diluted down in shareholdings.

So my view is that this particular course of action, is right and fair for a situation of this nature at this point in time.
Why? Everyone has the right to participate equally in this. You have a choice to maintain your current shareholding percentage levels.

No doubt, there will be guys who will say fuck man, this is some nasty pricing going on – why couldn’t they price the Rights Shares better – less discount to TERP or Last Traded Price. Give some chance to the minority investor lah, value the company higher leh. Especially the long time shareholders who have been there before COVID struck, say shareholders whose purchase price was S$9.50 or more. In my humble opinion, the discounts to TERP and last traded price do seem to border on the high side. 

But then again, why should another investor do so? Especially one such as Temasek where they’ll be scrutinized by the general public in their every move. There isn’t any motivation to do that, after all they are in the business of generating investment returns too. Furthermore, if you can get in at a value price, why not? This is quite a decent deal for Temasek, and they have actually managed to wrangle some juice in the MCBs for the minority investors. 

As a minority investor in the MCBs - you get a 4% redemption premium at the very least, and this is compounded. This is better than the SIA dividend yield no? Albeit you’ll only get this in cash when the investor calls for it, or in shares at the end of 10 years.

If I recall correctly – this pricing levels make this debt one of, or if not the most expensive “debt” SIA would have on its book. It steps up after 4 years too, so this would probably be first port of call for any potential deleveraging. 

Next steps for Existing Investors?

FYI - I’m looking at next steps below through the lens of an existing investor only. As a new investor, a different lens is warranted given the amount of opportunities out there at the moment.

Entitlement of the Rights Shares and the MCBs will be listed and traded on the SGX. If you are not in a position, or do not want to subscribe to the Rights Shares or MCBs, please remember to sell those entitlements, so you can get at least some cash even though you’ll be diluted down to 40% from the get go.

If you only have some spare cash, subscribe to the MCBs for certainty of return, well at least as long as SIA is a going concern and I can assure you there is a high chance it will be – I suggest to take comfort in this action by Temasek.

If you have sufficient cash, I urge you to subscribe for both, or even take up excess rights (there is a provision for that). You average down your cost price, at least maintain your ownership levels, and get MCBs for some “income” return, or more SIA shares at the end of 10 years. Think long term – the Singapore Government cannot afford to let the aviation sector in Singapore fail, given the tremendous amount of investment already made. And Singapore Airlines is one of its prized jewels on that crown.

But whether that will translate into a healthy investment return for the existing investor – I don’t know for sure, but I can see a decent margin of safety at these prices.

Thanks for reading and I hope you found this helpful. Leave comments below!


  1. wtf.. quality of critical thinking skills

  2. not surprisingly, mega selling of SiA shares today

  3. SQ management lacks aviation expertise. hundreds of millions to billions is lost almost every year through fuel hedge.
    fuel accounts for 40% of operating costs.

  4. maybe you can just mirror what Temasek / GIC does. After all, given the intertwining of the business landscape between GLCs, Government and SWFs in Singapore, even if you get fucked, you won’t get fucked so bad.

    yes.. look at the billion dollar losses during sub prime crisis

  5. I did an analysis given a lot of people were asking me the same thing - a deeper fundamental analysis which I shall not share in full here.

    But I think SIA is going to see a new-normal trading range well below where it historically traded ($9-12 in recent years) and likely ~<$4 in the near term post rights issue. Risks are skewed to the downside if there is a prolonged recovery (i.e. non-recoverable Covid cash burn) and inability to demonstrate positive cash flow generation for debt reduction. This view is primarily based on a run-rate EBITDA range and a historical range of trading bands although SIA has traded up on a multiples basis recently.

    Dividend is likely to come under pressure given the increased share base and near term cash flow constraints. FY2020E yield of 2.8% at current trading, scaling to 4.0% at TERP.

    Agree the strategy is very different for an existing investor vs. a new investor. If you are new and thinking of putting money in - my sense is that there are a lot of better opportunities out there. An existing investor can choose to liquidate the position today (although TERP has now moved towards $4) and rebalance into those better wider market opportunities or reduce their cost basis through the rights offering - but be prepared to wait out a couple of years for a better recovery / return.

    1. i was looking to buy the share to own the MCB but oh well as a new investor i cant even get the date when will this MCB be implemented HAIZ