Singapore Airlines (SIA) - Phillip Securities 2021-06-04: 2021 Mandatory Convertible Bonds (MCB)


Singapore Airlines (SIA) - 2021 Mandatory Convertible Bonds

  • SIA (SGX:C6L) is issuing rights to a 2021 mandatory convertible bond (MCB) to raise S$6.2bn.
  • Timeline:
    • 27 May: SIA shares ex-rights.
    • 2 Jun: Trading of rights & acceptance and payment for rights.
    • 10 Jun: Last day of rights trading.
    • 16 Jun: Last day of acceptance and payment for rights.
    • 24 Jun: Issuance of MCBs.
    • 25 Jun: Commencement of trading of MCBs.

SIA 2021 mandatory convertible bond (MCB) terms.

  • The MCB is a bond that will be converted into SIA shares upon maturity. Existing shareholders of SIA are entitled to 209 rights 2021 MCBs for every 100 SIA shares they owned before 27 May 2021. Issue price is S$1 for every 2021 MCB.
  • The MCB is a zero-coupon bond maturing in nine years’ time, on 8 June 2030.
  • Conversion price upon maturity is S$4.84 per SIA share with a final accreted principal amount of S$1.69797. This translates to a cost per share of S$2.85 when the MCBs are converted into SIA shares.
  • SIA has the option to redeem the bonds early.

What this means for investors.

  • Every S$1,000 invested in the 2021 MCBs will be worth S$1,697.97 upon maturity. This will be paid to bondholders in SIA shares at a conversion price of S$4.84, which amounts to 350 SIA shares. This is equivalent to purchasing SIA shares today at S$2.85 each, or an annual yield of 6% if SIA’s shares are priced at S$4.84 on the maturity date.

Early redemption option.

  • SIA has the option to redeem the MCBs partially or fully before maturity, every sixth months from the bonds’ issue date. Early redemption will be paid in cash. Bondholders’ returns will vary with the date of early redemption. If redeemed within Years 1-4, annual yield would be 4%. If Years 5-7, yield would be 5% and Years 8-9, 6%.
  • SIA may choose early redemption if:
    1. its operations recover well and cash flows are positive, or when
    2. it is in a position to redeem using other sources of liquidity.

The Positives

Irrevocable undertaking by Temasek.

  • Temasek Holdings has given an irrevocable undertaking to subscribe to its pro-rated rights 2021 MCBs. It has also undertaken to subscribe to any unsubscribed rights after the fulfilment of all valid applications.

No immediate share-price dilution.

  • As the MCBs will be converted into shares upon maturity, there is no immediate share-price dilution. 
  • The MCBs will be accounted for as equity on SIA’s balance sheet but not in the computation of book value or earnings per share. This would bring its net gearing down from 0.41x as at 31 March 2021 to 0.02x.

The Negatives

Zero coupon.

  • The MCBs pay no coupon. However like SIA’s previous 2020 MCBs, the 2021 MCBs may be traded on the SGX, subject to meeting sufficient spread requirements. Bondholders may choose to realise any capital gains earlier. The MCBs’ price can appreciate due to the call option embedded in them.

6% yield to maturity not guaranteed.

  • In the event that the MCBs are converted into shares on maturity, bondholders’ returns may be lower than the stipulated 6% annual yield if SIA's share price is below S$4.84.


Timothy Ang Phillip Securities Research | https://www.stocksbnb.com/ 2021-06-05
SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000