Most of you would probably have been aware of Singapore Airlines’ (SIA) plight and the need to do a massive fund-raising exercise, fully-backed by Temasek. This means that if Singaporeans are not willing to support our national carrier by subscribing to those new shares, Temasek will come in to backstop 100% of the issue. SIA looks to raise a total amount of S$15bn (SIA Rights), through a combination of S$5.3bn in Rights Shares issuance and S$9.7bn via Rights mandatory convertible bonds or MCB for short.
SIA RIGHTS ISSUE: DEBUNKING THE COMPLICATION BEHIND THE MATHS
By now, most of you would probably have been aware of Singapore Airlines’ (SIA) plight and the need to do a massive fund-raising exercise, fully-backed by Temasek. This means that if Singaporeans are not willing to support our national carrier by subscribing to those new shares, Temasek will come in to backstop 100% of the issue.
SIA looks to raise a total amount of S$15bn (SIA Rights), through a combination of S$5.3bn in Rights Shares issuance and S$9.7bn via Rights mandatory convertible bonds or MCB for short.
S$15bn looks like a HUGE amount of equity to be raised, particularly when one compares with SIA’s key competitor Qantas which, a few days prior to SIA’s announcement, highlighted that it has managed to secure ONLY A$1.05bn in collateralized (against its fleet of 7 Boeing 787 aircraft) debt funding at an interest rate of 2.75%. Qantas share price appreciated by 26%.
Unlike SIA which has been levering up on its balance sheet to make new aircraft purchases, Qantas, on the other hand, has maintained a steady net debt balance of A$3bn over the past 3 years. Comparatively, SIA’s net debt balance has ballooned to S$8bn (including lease liabilities) as at end-2019 as a result of their aggressive fleet renewal plan.
So, Qantas (with a market cap of A$5bn) requires an additional A$1bn to tide over this major aviation crisis (for now perhaps) while SIA (now with a market cap of S$7bn) requires a potential total of S$15bn (plus S$4bn in bridging loan) and one can see the huge disparity in terms of capital management.
With that notion in place, let’s evaluate the two Rights issuance, first the SIA Rights Share followed by the SIA Rights Mandatory Convertible Bonds.
I will then follow up with 4 scenario analysis for a potential SIA shareholder and calculate what might the market value of the SIA Rights Shares and SIA Rights MCBs be worth when they start trading.
Scenario 1: Bought SIA at S$5.80 and subscribe for Rights Shares
Scenario 2: Bought SIA at S$5.80 and subscribe for Rights MCBs
Scenario 3: Bought SIA at S$5.80 and subscribe for Rights Shares + Rights MCBs
Scenario 4: Purchase Rights Shares and Rights MCBs on the open market
ISSUANCE OF SIA RIGHTS SHARES
SIA will be issuing up to 1.78bn rights shares at an issue price of S$3.00 for each right shares.
This is on the basis of three (3) Rights Shares for every two (2) existing ordinary shares in the capital of the company. As of end-2019, SIA has got 1.18bn outstanding shares (excluding treasury shares), so the calculation is (1.18bn/2 ordinary shares * 3 rights shares = 1.78bn new right shares)
At S$3/rights shares, this is a 53.8% discount to the last transacted price of S$6.50 before the announcement was made. The calculated theoretical ex-rights price (TERP) is S$4.40 per share.
How does one calculate the theoretical ex-rights price? At S$6.50/share with 1.18bn of outstanding shares, the market cap of SIA is S$7.67bn.
With the issuance of 1.78bn rights shares, total number of shares will increase to 2.96bn. Total amount of capital raised = 1.78bn * S$3.00 = S$5.34bn
So post rights issuance market value of SIA = (existing market cap (S$7.67bn) + new cash raised (S$5.34bn)) / total number of new shares (2.96bn) = S$4.40/share.
These rights will be renounceable. This means that existing SIA shareholders can actually sell their rights on the open market if they do not wish to pay S$3.00/share to subscribe to it. This will, however, mean dilution to the shareholder. How much can they sell for? We will touch on this later.
With that, let’s move on to the Rights MCB which is slightly a little more complicated.
ISSUANCE OF SIA RIGHTS MCBS
SIA plans to raised c.S$3.5bn from the first tranche of Rights MCBs. If insufficient, the company could raise a further S$6.2bn to bring the total Rights MCBs amount to S$9.7bn!
The Rights MCBs are proposed to be offered, also on a renounceable basis, and issued in the denomination of S$1.00 for each Rights MCB, on the basis of 295 Rights MCBs for every 100 existing ordinary shares.
These Rights MCBs pay zero-coupon and will mature on the 10th anniversary year of the date of issue. When they mature, these Rights MCBs will be converted into shares.
However, the catch here is that there is no certainty that SIA will convert these Rights MCBs into shares upon maturity as there is an option for them to redeem the Rights MCBs in whole or in part on every six-month anniversary of the issue date. More on this later.
Given that there are 1.18bn ordinary shares, the total number of Rights MCBs will be equal to 3.48bn (1.18 existing ordinary shares / 100 * 295). At S$1 each, the total amount of gross proceeds will be equal to S$3.48bn.
SO WHAT HAPPENS AFTER 10 YEARS WHEN THE RIGHTS MCBS MATURE?
S$1,000 invested in the Rights MCBs will grow into S$1,806.11, according to SIA’s calculation. This translates to a 10-year CAGR of 6.09%. A YTM of 6.09% looks pretty attractive but this return is NOT Guaranteed
The amount of S$1,806.11 will translate to 373 shares, based on a conversion price of S$4.84/share as mandated by SIA (S$1,806.11 / S$4.84/share = 373 shares). Your cost price is the S$1,000 you have paid / 373 shares = S$2.68/share.
You make a return of 6.09% per annum if SIA’s share price is at S$4.84 on maturity while you breakeven if the share price is S$2.68 on maturity and you start losing money if SIA’s price is below S$2.68 on maturity.
In this Rights MCBs exercise, every S$1,000 raised (a total of S$3.48bn will be raised) will translate to 373 shares upon maturity.
This means that a total of S$3.48bn/S$1,000 * 373 shares = 1.3bn shares will be raised from the Rights MCBs.
Recall two things: 1. The total number of shares from Rights Shares = 2.96bn and 2. Total number of shares from Rights MCBs = 1.3bn
Total number of shares after all conversion = 2.96bn + 1.3bn = 4.26bn shares.
So after this whole exercise, SIA will raise a total of S$5.34bn (Rights shares) + S$3.48bn (Rights MCBs) = S$8.8bn. With a current market cap of S$7bn (at S$5.80), which brings the total value of SIA to S$15.8bn. The theoretical ex-rights price after all conversion = S$15.8bn / 4.26bn shares = c.S$3.68
SCENARIO ANALYSIS TO CALCULATE THE EX-RIGHTS PRICE FOR EACH SCENARIO
In the scenarios 1-3, we will assume that 1,000 shares of SIA were purchased at the current market price of S$5.80. This will entitle the investor to 1,500 Rights Shares and 2,950 Rights MCBs.
Do refer to here for the various scenario analysis tables and how to calculate the Rights Shares and Rights MCBs prices.
Thanks for reading.
Once again, this article is a guest post and was originally posted on Royston_Tan‘s profile on InvestingNote.
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