SIA MCB – A Catch-22 situation

Here comes another round of nightmare for $SINGAPORE AIRLINES LTD(C6L.SI)$ shareholders. Last night, SIA announced a renounceable rights issue of mandatory convertible bonds (“MCB”) to raise another S$6.2 billion from shareholders.

In summary, a shareholder of SIA holding 1000 shares will have the right to take up 2090 MCBs issued at par of S$1 per share. Terms of this MCB is generally the same as the one that was issued in Jun 2020.

If you have bought SIA shares yesterday, you would have paid around S$4,700 for 1 lot of the shares. But now, you will have to fork out an additional S$2,090 to subscribe for the MCBs, that is if you choose to subscribe for the shares.

What do you get out of these MCBs?

1. No coupon payment throughout the term of the MCB. You only get your returns upon redemption by SIA or upon maturity on 8 Jun 2030, which is about 9 years later.

2. If SIA redeem the MCB before maturity, your effective yield to call is from 4% to 6%, depending on the time that the redemption happens.

3. If SIA does not redeem the MCB and the MCB reaches maturity, you will receive around 432 SIA shares from the conversion. This number will change over time as the conversion price of S$4.84 may be adjusted along the way.

I believe that SIA shareholders, once again, are in a catch-22 situation with this latest round of fund raising.

If investors choose not to subscribe, they face significant potential dilution. Including the first tranch of MCB, the dilution impact is about 47% if all MCBs are converted.

However, if investors choose to subscribe, the amount of additional cash needed to subscribe is significant. Using the earlier example, the investor who bought SIA shares yesterday will need to top up S$2,090 and this means another 44% more to put into this counter in addition to what he paid for the mother shares yesterday.

Moreover, the investor will not be seeing any form of cashflow or return from this investment over the short term. 

Also, with interest rate going up, one should also consider the negative impact on bond prices going forward. And also, the long term outlook of SIA and whether the conversion price is reasonable over the long term.

Hence one should evaluate if there are other better options in the market to generate returns higher than 4% to 6% per year over a 9-year period.