Singapore Airlines Rights Shares and Rights MCBs

Many of us may own SIA shares, or probably knows someone who does. The ongoing Covid-19 pandemic has hit airlines around the world in a manner never seen before, and SIA has not been spared.

The recent rights issue is fairly complicated, and I want to outline the implications here. The key takeaway is that Doing Nothing Will Hurt You Greatly. Read on to find on why.

What are shareholders getting?

Shareholders who held SIA shares at 5 May 2020 5pm will get two types of rights: Rights shares, and Rights MCBs.

• The holder of a Rights shares has the option (but not the obligation) to exercise the rights share by paying an exercise price of $3 to obtain one SIA share.
• The holder of a Rights MCB has the option (but not the obligation) to exercise the rights MCB by paying an exercise price of $1 to obtain an SIA Mandatory Convertible Bond (MCB).

Let's assume that the shareholder owned 2000 SIA shares ("mother shares") as at 5 May 2020 5pm. This person will receive 3000 Rights shares + 5900 Rights MCBs.

• To convert the 3000 Rights shares into 3000 actual SIA shares, the holder will need to cough up additional $9000 (i.e. $3/share). The holder will then have a total of 5000 SIA shares.
• To convert the 5900 Rights MCBs into MCBs, the holder will need to cough up additional $5900. MCBs convert into SIA shares 10 years from now.

To be clear, the holder is putting up this $14900 to raise money for SIA. In doing so, the holder doesn't own "more" of SIA. The value of the existing 2000 mother shares is being diluted (quite severely) in order to help SIA raise money to fund its financial needs as a going concern. The dilution explains why SIA's share price fell from $5.91 at the close on 5 May, to close at $4.40 on 6 May.

What to do?

The holder has to decide if (1) they want to pump more money into SIA at this time, and (2) what is their investment horizon.

My take is that, for the near-term, SIA is a high-risk asset. It is by now well-known that they have made a disastrous fuel hedge, and are hence hit by a double whammy of being forced to buy fuel at an insanely high price and also not even being able to burn the fuel to generate anything resembling revenue.

Given the global economic situation, the holder should also think carefully if committing close to $15000 of cash to a high-risk asset is sensible. For most retail investors, the cash outlay might simply be too high to stomach - if you're about to break into your piggy bank to help SIA, one piece of advice: Don't.

Assuming that you do not intend to exercise both the rights shares and the rights MCBs, there is a silver lining: both can be sold during a very brief window, in return for cash. Think of it as if you receive a discount coupon: $20 off your next meal at XYZ restaurant, if you spend a minimum of $200. If you're never going to hit a $200 meal, the coupon is meaningless to you. But if the person after you just happens to be paying for their $250 meal, you may be able to let it go for $10. Win-win.

• The rights shares will start trading from 13 May 2020, 9 am until 21 May 2020, 5 pm. The theoretical best price that one can get for a rights share is $1.40 (taking market price at $4.40 then deducting the $3 exercise price). If you don't intend to exercise the rights share, you MUST sell within this period. If you fail to do so, then after 21 May 2020, 5 pm, you will have to decide if you are going to (a) cough up $9000 extra to convert the rights share into actual shares, or (b) forfeit the option entirely, throwing close to $4000 of value (assuming $1.40 * 3000 rights shares) down the drain.
• The same applies for the rights MCBs, which will start trading from 13 May 2020, 9 am till 21 May 2020, 5 pm. I am not sure how to price the rights MCB because its a complex product, so one might want to see how the market prices it on 13 May, then proceed to try to sell on 14 May. My guess is that each rights MCB is probably worth a couple of cents, or maybe even zero. If they are priced at 1 cent each, 5900 rights MCBs is less than $60, so your brokerage fees might not make the sale worthwhile.

Some may wonder about what exactly is a Mandatory Convertible Bond, and might even ask, aren't bonds good in this present climate? Please dispel any notions that bonds are safe - we need only to refer to Hyflux as an example. Bonds are only as safe as the issuer's credit risk, and in this case, the issuer is an airline with barely a trickle of revenue for the foreseeable few months, and a fuel hedge that's going horrendously wrong, The MCBs being issued by SIA are zero-coupon bonds, meaning that they ordinarily won't pay you back a single cent until 10 years from now. There is an embedded call option, where if SIA decides to redeem the bond early, they will have to pay bondholders the principal amount + a range between 4% to 6%. These yields are quite low for a high-risk asset, so I would recommend retail investors to avoid thinking of these yields as "good" in any way.

The intent of this post was to share on what you need to do if you are electing to not exercise the rights. If you want a bit more nitty-gritty onto how the MCBs work, I suggest taking a look at the informative video by DrWealth here.

In the next post, I share on a possible trading strategy for investor with access to cash.