S$15b cash call gives SIA a shot at surviving Covid-19

Singapore

SINGAPORE Airlines' massive cash call of up to S$15 billion - backed by Temasek Holdings' financial heft - will boost the national carrier's stamina to endure the Covid-19 pandemic that has decimated global air travel. The proposed exercise, involving a rights issue of new shares and convertible bonds, will also give it a shot at restoring itself when the crisis ends.

Brendan Sobie, independent analyst and founder of Sobie Aviation, puts it succinctly: "SIA is now in a very enviable position to be able to wait until the international market recovers, whenever that is".

That's a widely-shared sentiment.

"We view the capital raising as essential to handle the Covid-19 crisis and will ensure not just SIA's survival, but also increase its future probability of thriving against its competitors," said Raymond Yap, analyst at CGS-CIMB Research.

Yet the market reacted predictably to the massive dilutive impact of the proposed S$5.3 billion rights issue - a dilution of 60-82 per cent awaits shareholders, according to Bloomberg Intelligence - pushing the stock down amid gains in the Straits Times Index.

SIA shares fell sharply by 42 Singapore cents or 6.5 per cent to finish at S$6.08 on Friday after starting the trading day on a more sour note and losing nearly 11 per cent to an intraday low of S$5.82. The counter, which was halted from trading on Thursday pending the announcement, saw some 19 million shares worth S$117 million traded.

Investment analyst David Blennerhassett at Quiddity Advisors and insight provider for Smartkarma said: "If you are an arb (arbitrage trader), I would look to own the borrow.

"If you are a tax-efficient long-only investor, be on the watch for the rights trading cheaply. You can replace your current position with more cheaply-traded rights, especially if you are a smaller investor".

The size of the deal is staggering and marks Temasek's largest investment deal to date.

To keep the airline standing as global travel grinds to a near standstill amid widespread travel restrictions (the airline itself has slashed 96 per cent of its capacity), SIA is proposing a 3-for-2 renounceable rights issue of up to 1.8 billion new shares at S$3 apiece - about a 54 per cent and 32 per cent discount to the last pre-suspension traded price of S$6.50 on Wednesday and theoretical ex-rights price (TERP) if S$4.40 respectively.

SIA has also proposed a S$9.7 billion issue of ten-year mandatory convertible bonds (MCBs), S$3.5 billion off the bat and a further issue of S$6.2 billion within 15 months of getting shareholders' nod for the transaction, to muscle up its capital base to grab opportunities when the Covid-19-led bottom ends.

As the MCBs will be issued on the basis of 295 MCBs for every 100 shares, analysts say dilution is a "distant concern" for shareholders while it is also likely that SIA will redeem the zero-coupon MCBs before they mature in 10 years.

"Our belief is that if industry conditions and SIA's balance sheet improve sufficiently during this time frame, it will do its best to redeem the MCBs in order to avoid further dilution for shareholders," said CGS-CIMB's Mr Yap. He estimates an implied yield per annum of between 4 and 6 per cent if SIA chooses to redeem the MCBs anytime from four to ten years.

For the company, the deal is a shoo-in with Temasek, which owns 55.5 per cent of SIA, undertaking to vote in favour of and subscribe to its full entitlement plus take up the unsubscribed portions.

To say Temasek's rescue bid for SIA is timely would be an understatement.

The carrier's stock price has suffered a whiplash and plumbed a 21-year low on Monday amid concerns of severe liquidity issues as countries struggle to contain the spread of Covid-19 and restrict travels. A big disadvantage for SIA is that it does not have a domestic market. With the ensuing capacity cuts, SIA was facing a potential S$1 billion decline in revenue and pre-tax operating cash deficit of S$200 million to S$240 million for the fourth quarter FY20, said UOB Kay Hian analyst K Ajith.

"SIA would be in a precarious position by end-June, if additional liquidity is not made available," he said in a report dated March 23, adding that the carrier would require at least S$5 billion in new funding by June from debt markets or an equity cash call to avert a systemic risk across the supply chain.

His worry was addressed on Thursday with the massive lifeline thrown to the national carrier.

Another headache was SIA's overhedged fuel position, which has turned costly amid the current oil price slump. The airline has hedged Brent crude at a strike price of US$58 a barrel versus spot price of US$27 a barrel and jet fuel at US$74 a barrel.

"Unlike other airlines which keep their hedges short-term, knowing that they can move fares fairly rapidly to compensate for higher fuel costs, SIA had long-term hedges in both jet fuel and more so in crude oil. Although the fuel drawdown is negligible now, the hedge positions are out of the money," said Alan Greene, corporate credit analyst and an Insight Provider on SmartKarma.

Some relief also came from the Singapore government's support package for the aviation sector that was unveiled on Thursday. Among other things, it includes rebates on landing and parking charges, and rental relief for airlines.

But the big boon was the Jobs Support Scheme which analysts say will help the airline defray a significant portion of its staff costs, which make up a large portion of its fixed cash costs.

SIA Group employs over 27,000 people and analysts estimate the wage support scheme could result in cost savings of some S$400 million-S$600 million.

"Not all governments and government-linked investment companies will be able - or have the willingness - to offer this level of support to its airlines," said Mr Sobie.

He added: "How this impacts and shapes the industry post-crisis will be interesting to see. SIA may be able to take advantage of opportunities that arise from this crisis by acquiring other airlines and/or accelerating expansion in Singapore. Singapore could emerge as an even stronger hub over the long term, helping justify the massive investments in additional capacity at Changi".