Sias raises questions about Singapore Airlines' cash call, ahead of EGM

THE Securities Investors Association (Singapore) or Sias has drafted a series of questions for Singapore Airlines (SIA) to address and publish before the national carrier's April 30 extraordinary general meeting (EGM) on its proposed S$15 billion debt and equity capital raising.

The airline last month announced the massive cash call to tide it over the coronavirus pandemic that has decimated global air travel. One part of it is a proposed S$8.8 billion renounceable rights issue, comprising a three-for-two issue of up to 1.78 billion shares to raise S$5.3 billion and an offering of up to S$3.5 billion in 10-year mandatory convertible bonds (MCBs).

The other component is an additional issue of up to S$6.2 billion in additional MCBs to be offered to shareholders via one or more rights issues down the line.

For the S$8.8 billion rights issue, Sias president and CEO David Gerald asked why a large portion of it - 38 per cent or S$3.3 billion - will be used for capital expenditure purposes.

In a letter addressed to SIA chief executive officer (CEO) Goh Choon Phong on Tuesday, Mr Gerald also requested that the company explain why it is raising such a large amount in its cash call.

As for the rights issue price of S$3 per share, Sias asked how this figure was determined, and whether the discount - of about 53.8 per cent to March 25's closing price of S$6.50 - is in line with market levels.

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Sias also questioned why the carrier chose to raise cash from shareholders, and whether it has explored other means such as taking out loans from banks.

Some of his other questions involve the rationale behind the MCBs' conversion price of S$4.84, the differences in yield depending on when the MCBs are redeemed, the conduct of the EGM to ensure it is accessible to all shareholders and how the airline plans to improve its operational performance to shore up its stock price in light of the Covid-19 crisis.

The investor advocacy group's list of questions are:

- Why is SIA raising such a large amount? How did you determine this amount?

- The rights issue may have a significant dilutive impact on some retail shareholders who do not have sufficient cash to subscribe for the rights. Why is SIA choosing to raise cash via shareholders, instead of from other debt? Have you explored other means?

- SIA stated that the rights issue was meant "to strengthen the company's balance sheet and liquidity position" and "to meet its ongoing financial commitments". However, a significant portion of the funds raised is for capital expenditure (capex). Why is there such a large percentage committed to capex? If the funds raised are purely for cashflow and balance sheet reasons, does SIA really need to proceed with such a sizeable rights issue, given the substantial impact on share dilution and share price?

- How was the rights issue price of S$3 per share determined? Is the discount in line with the market?

- Why did the company propose to issue the MCBs, in addition to the shares? Why are there rights MCBs as well as additional MCBs? How do their terms differ from each other?

-   The MCBs' conversion price of S$4.84 at maturity is at a 10 per cent premium to the theoretical ex-rights price of S$4.40. Investors will get fewer shares after conversion, with this premium, compared to if the conversion price were lower. What is the rationale for setting a premium and how was the 10 per cent derived?

- If SIA redeems the MCBs within the first four years, the yield to call will be 4 per cent per annum, compounded on a semi-annual basis. If the bonds are redeemed within years five to seven, the yield to call is 5 per cent; if they are redeemed within years eight to ten, yield to call will be 6 per cent. If held to maturity, the implied yield is 6 per cent per annum compounded semi-annually. The yield to call of 4 per cent and 5 per cent appear to be far lower than the implied yield of 6 per cent if held to maturity. What are the reasons for the differences in yield?

-  Net gearing was calculated to be -0.23 if all the rights MCBs are converted, and -0.40 if all rights MCBs and additional MCBs are converted. This is arguably too conservative and comes at the expense of lower share prices. Will Singapore Airlines consider reducing the size of the rights issue and take out some debt instead to make up the shortfall?

- Some retail shareholders may not be familiar with how MCBs work. Can SIA share any relevant data points or comparables with the market, or provide an illustrations of how the bonds will work, to allow shareholders to make an informed decision?

- Earnings per share (EPS) is expected to drop from 57.7 Singapore cents to 23.1 cents after the rights issue but before conversion of all rights MCBs; EPS will fall to 16 cents assuming the conversion of all rights MCBs. This significant drop in EPS will likely generate significant downward pressure on the share price. Given the ongoing pandemic and overall uncertainty in the business environment, how does the airline intend to beef up its operational performance?

- SIA will be conducting its EGM on April 30 via a live webcast. However, some shareholders might be unfamiliar with accessing a meeting through electronic means. What is the company doing to ensure that the EGM remains accessible to all its shareholders?

- Given Temasek's irrevocable undertaking to vote in favour of the cash call at the EGM, how will SIA ensure that the EGM procedure is fair to minority shareholders and that their concerns are addressed before they cast their votes?

- What is SIA's assessment of the outlook for the aviation industry, given the Covid-19 situation?

Both the rights issue and the additional issue will be tabled for shareholders' approval at the EGM, which will be conducted by the airline group's chairman Peter Seah and CEO Mr Goh.

The carrier's shares were trading at S$6.05 as at 2.47pm on Tuesday, down S$0.18 or 2.9 per cent.