SIA has grounded 96% of their flights to date. They need money to operate and I earlier estimated that they will run of cash in 2 months. There are two ways to raise money: borrow or you exchange paper for money aka print money. If you borrow, you have to return what you borrowed with interests. If you print, you don't have to return and you don't have to pay interest. So SIA obviously chose to print money. Who wouldn't right?
Link to the press release. Extracted key points below:
In a late announcement on Thursday, the airline said it is proposing a renounceable rights issue of up to 1.77 billion new shares at S$3 per share, on the basis of three rights shares for every two existing shares held by shareholders, to raise S$5.3 billion. The issue price represents a discount of about 53.8 per cent to the last transacted price of the S$6.50 on March 25. It added that the theoretical ex-rights price will be S$4.40.
SIA is also proposing to raise up to S$3.5 billion via a 10-year mandatory convertible bond (MCB) issue on the basis of 295 Rights MCBs for every 100 existing shares owned. The bonds, which come with zero coupon, will be priced at S$1 each. If not redeemed before the maturity date in 10 years, the MCBs will be converted to new shares based on a conversion price of S$4.84, which is a 10 per cent premium to the ex-rights theoretical price.
In addition, SIA will also be seeking approval to further issue up to S$6.2 billion of additional MCBs on similar terms and to be offered to shareholders via one or more rights issues down the line. This could take place within 15 months of being approved by shareholders.
SIA will be issuing rights (akin to printing money), 3 rights shares for every 2 shares you hold at $3/rights share. This means that the shares will be diluted, the existing shares will form 40% and the new shares from the rights issue will form 60%. Now maybe you receive $0.30 for every 1 share you own, but after the rights issue, because more people are sharing the pie, you will only get to eat $0.30 x 40% = $0.12/share.
What's peculiar about this rights issue is that they also have a convertible bond with no coupon (i.e. no interest). The catch is if SIA does not return the money, SIA will need to issue more shares. Based on SIA's past record, in a good year with $1B profit, they pay you $0.30/share of dividends. Assuming they continue to pay you $0.30/share, they will only have $650M left. They will need to save up $3.5B / 650M = 5.4 good years to return the money to shareholders. Temasek likely negotiated to give them 10 years to save it up. If a recession were to happen and SIA is unable to have a good year, assuming flights are 100% and profits are halved at $500M, SIA will need to presumably halve its dividend ($0.15/share), with $300M left. They will need to save up $3.5B / 300M = 11.7 years to return the money to shareholders. This means that over the next 10 years, SIA needs a few good years and no more flight grounding epidemics to be able to return $3.5B.
SIA is also seeking approval to have another $6.2B MCB on the same terms via one or more rights issues to shareholders within 15 months of approval, which means near term. This is scary. Returning $3.5B sounds like a mean feat. If they were to need $6.2B in the coming 15 months, redeeming $3.5B + $6.2B = $9.7B 10 years from now will be impossible because it means SIA needs 10 good years ($1B/year) and not pay out any dividend and no more similar epidemic (which is practically beyond control).
So the best case scenario is SIA returns all the $3.5B or $9.7B if they were to need the additional $6.2B within the next 15 months.
Current total shares = 1.19B
Total shares after 3-for-2 rights issue = 1.19B x 2.5 = 2.975B
Dilution effect = 1.19B/2.975B = 0.4
If SIA is unable to repay the $3.5B or $9.7B, all share holders who subscribed to the MCB will get more shares in SIA "295 Rights MCBs ($1 each) for every 100 existing shares owned, where rights are converted at $4.84/share".
Then the better case scenario, is where there is only $3.5B MCB.
Conversion of MCB to shares for $3.5B MCB = 3.5B / $4.84 = 0.723B shares
Total shares after $3.5B MCB conversion = 2.975B + 0.723B = 3.698B shares
Dilution effect = 1.19B/3.698B = 0.322
Worse case scenario, $9.7B MCB
Conversion of MCB to shares for $9.7B MCB = 9.7B / $4.84 = 2.004B shares
Total shares after $9.7B MCB conversion = 2.975B + 2.004B = 4.979B shares
Dilution effect = 1.19B/4.979B = 0.239
Worst case scenario: SIA becomes bankrupt.
How much do you have to pay as a shareholder to subscribe to all the rights and MCB?
If you own 1000 units of SIA now, you will be entitled to
- 1500 rights @$3 each
- 295/100 x 1000 = 2950 MCB rights @$1 each (converted to 610 shares)
Total cost to you = 1500x3+2950 = $7450 for 2110 shares, to prevent your 1000 units share dilution
If SIA draws from the additional $6.2B MCB, you will be entitled to another
- 295/100 x 2500 = 7375 MCB rights @$1 (converted to 1523 shares)
Total additional cost to you = $7450 + $7375 = $14825 for (2110+1523=3633 shares)
I don't know how many shareholders will subscribe to this. It sounds like an expensive investment to ensure SIA's survival.
Assuming SIA maintains its dividends of $0.30/share, here's how your investment will pan out if you spend or don't spend that $7450 (with the upper limit being $14825).
If you don't spend $7450 (or $14825),
Best case - MCB is fully redeemed, dividend will be $0.30 x 0.4 = $0.12/share
Worst case - $9.7B MCB is not redeemed, dividend will be $0.30 x 0.239 = $0.0717/share
If you bought SIA shares at a peak of $16 back in the good old days, your dividend yield will become 0.0717/16 = 0.4%
Or if you bought it at $11, your yield will be 0.0717/11 = 0.65%
of at $6, yield = 0.0717/6 = 1.2%
And this is assuming dividends are maintained. If dividends are slashed by half, then your yield will also be halved, which means... I think you know how to halve it.
If you spend $14825 (why I say this is because you either cut losses and don't spend anything or you spend to maintain your share)...
Best case = Worst case = you still get $0.30/share if dividends are maintained.
If you bought at $16, yield = 0.30/16 = 1.9%
If you bought at $11, yield = 0.30/11 = 2.7%
If you bought at $6, yield = 0.30/6 = 5%
If the yield is 2%, it means you have to hold 50 years to break even... 1% yield breaks even in 100 years!
Is there a way to still invest in SIA? Probably... Buy if prices fall to $3?
If I spend $3000 to buy 1000 units, subscribe to rights and MCB at $14825, and then pray hard that dividends are maintained at $0.30, for a yield of 10%. If dividends are halved, yields drop to 5%.
Or maybe sell and cut losses now and buy again at lower prices? Assuming after all the dilution, SIA is still a darling demanding a 2% yield, dividends maintained,
if 2% - $0.0717/share / 2% = $3.60/share
if 4% - $1.79/share
if 6% - $1.20/share
if dividends are halved,
2% - $1.80/share
4% - $0.90/share
6% - $0.60/share
So will I buy SIA? Not anytime in the near future.
If I happen to have SIA shares, which I don't, I will put my $14825 in a good REIT which will easily pay me more than what SIA can possibly pay me in the next 10 years. If I am lucky with a 10% yield, like the days AIMS REIT fell to $0.90/share (yield 11%), I may even get my capital back in 9 years, without having to hope that SIA redeems the MCBs.
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