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Introduction

SIA shareholders would have received a corporate action regarding the rights issue of a 2^nd tranche of MCBs (aka Rights 2021 MCBs), and many have asked if it’s worth subscribing to.

For reference, SIA’s MCBs were NOT popular at all when the 1^st tranche came out in 2020. 96% of the 1^st tranche of MCBs issued in 2020 was taken up by Temasek (despite Temasek only owning 55% of SIA), as the 2020 MCBs were severely under-subscribed by investors.

This serves as a gauge for investor opinion at that point in time, and in our opinion, sentiment is unlikely to have shifted much from then.

Many have taken the view SIA’s recovery will not come quickly enough, given Singapore’s lack of domestic routes that other airlines in countries like China, US and Australia can rely on.

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The InvestQuest View!

We DO NOT see any economic rationale in subscribing for the Rights 2021 MCBs, given that buying the 2020 MCBs in the secondary market would result in a more favourable investment outcome.

2020 MCBs currently trade at around S$1. At this price, they offer a higher yield-to-call and in a share conversion scenario would offer more shares  – compared to the 2021 MCBs. In addition, we believe that the 2020 MCBs are more likely to be called back than the 2021 MCBs.

That’s a comparative choice between 2020 MCBs (more attractive) vs 2021 MCBs (less attractive). We’re not making an outright statement about whether it’s worth buying 2020 MCBs right now. If you want to read on how to go about analyzing MCBs as investment opportunities, you can take a look at our previous article (published Oct 2020).

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We had previously written on SIA stock, the SIA 2020 MCBs and SIA’s convertible bond issue as well, in case you need a refresher:

28 Sep 2020: If SIA’s profits returned to pre-Covid levels tomorrow, is it a “BUY” at today’s price?

1 Oct 2020: Singapore Airlines’ Mandatory Convertible Bonds (MCBs) are now yielding 7-8% p.a. Are they a good buy?

15 Nov 2020: SIA Issues S$850m of Convertible Bonds: What does it mean for shareholders and MCB bondholders?

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Article Summary

1) Rights 2021 MCBs: Two possible outcomes

2) What’s the difference between 2020 MCBs and 2021 MCBs?

3) Key dates for the 2021 MCBs rights issue

Appendix: Temasek’s stake in SIA should the MCBs get converted

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1)  Rights 2021 MCBs: Two possible outcomes

Assuming SIA does not default, MCBs investors will face two possible outcomes:

• Scenario 1: SIA redeems the MCB before maturity
• Scenario 2: SIA DOES NOT redeem the MCB before maturity. As a result, the MCB is converted to SIA shares

For investors who subscribed to the 2021 MCBs at $1, what’s the return in Scenario 1 & 2?

• Scenario 1: Investors will enjoy a 4-6% yield per annum depending on when the MCB is redeemed.
  • If the MCBs are redeemed…
    • Within the first 4 years, 4% per annum
    • Between the 5^th and 7^th year, 5% per annum
    • Between the 8^th and 9^th year, 6% per annum
  • With regard to the yield, note that the MCBs do not pay out coupons. Instead, the MCBs “accrue” the returns resulting in a higher redemption price.
  • The returns are compounded semi-annually.
• Scenario 2: Investors may receive positive/negative returns depending on SIA’s share price on the maturity date (8 June 2030). Investors who subscribed to the 2021 MCBs would breakeven as long as SIA’s share price is $2.85 or higher in the event of a share conversion (calculation: $1 cost to buy the 2021 MCB, divided by 0.351 SIA shares received during a share conversion).

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2) What’s the difference between 2020 MCBs and 2021 MCBs

Comparing key investment terms

We highlight some of the key investment terms of the 2020 MCBs and 2021 MCBs. Highlighted in orange are areas where they differ.

As the maturity date of both the 2020 and 2021 MCBs is the same, the final accreted principal for the 2020 MCBs would be higher than the 2021 MCBs (given that it would have had 1 more year to accrue its yield).

As a result, in the event of a share conversion scenario, each 2020 MCB would converted to more SIA shares than the 2021 MCB (0.373 vs 0.351 SIA shares).

Comparing redemption dates and implied yields

SIA would have the option to redeem back the MCBs at semi-annual intervals. MCBs do not pay out coupons. Instead, MCBs “accrue” the yield resulting in a higher redemption price.

We have listed the MCBs’ redemption dates and the corresponding redemption prices in the table below, and have aligned the closest redemption dates of the 2020 MCBs and 2021 MCBs in the same row for easier comparison.

• For the 2020 MCBs, it last traded at a price of $1.002 (as of 4 June 2021). With that, we are able to compute its implied yield-to-call at each upcoming redemption date (middle column highlighted in green).
• For the 2021 MCBs, they are still pending issuance, so the yield-to-call is simply 4% – 6% (rightmost column highlighted in green).

We can make two observations from the above table:

1. At every comparable redemption date, the yield-to-call for the 2020 MCBs is always higher than the 2021 MCBs.
2. In a share conversion scenario, each 2020 MCB would get converted to more SIA shares than the 2021 MCB.

Separately from SIA’s perspective, it would be logical to redeem the 2020 MCBs first, as the “interest cost” of the 2020 MCBs would increase from 4% to 5%, and 5% to 6%, one year earlier than the 2021 MCBs.

We DO NOT see any economic rationale in subscribing for the Rights 2021 MCBs, given that buying the 2020 MCBs in the secondary market would result in a more favourable investment outcome.

That’s a comparative choice between 2020 MCBs (more attractive) vs 2021 MCBs (less attractive). We’re not making an outright statement about whether it’s worth buying 2020 MCBs right now. If you want to read on how to go about analyzing MCBs as investment opportunities, you can take a look at our previous article (published Oct 2020).

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3) Key dates for the 2021 MCBs rights issue

The below are a few important deadlines to note.

SIA shares trade ex-rights:	27 May 2021 (Thur)
Trading of Rights 2021 MCBs commences:	2 June 2021 (Wed, 9am)
Trading of Rights 2021 MCBs ends:	10 June 2021 (Thur, 5pm)
Last date to accept and pay for Rights 2021 MCBs:	16 June 2021 (Wed, 5pm via CDP, or 9.30pm via ATMs / PayNow)
Issuance of 2021 MCBs:	24 June 2021 (Thur)
Trading of 2021 MCBs commences:	25 June 2021 (Fri)

For SIA shareholders who have received rights to subscribe to the 2021 MCBs and think that what we have said makes sense, you should try to sell your rights (SGX ticker “ZJGR”), at any value above zero.

Trading for the Rights have already commenced on SGX, and the last day you would be able to trade the Rights is 10 June 2021 (Thur).

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The InvestQuest View!

We DO NOT see any economic rationale in subscribing for the Rights 2021 MCBs, given that buying the 2020 MCBs in the secondary market would result in a more favourable investment outcome.

2020 MCBs currently trade at around S$1. At this price, they offer a higher yield-to-call and in a share conversion scenario would offer more shares  – compared to the 2021 MCBs. In addition, we believe that the 2020 MCBs are more likely to be called back than the 2021 MCBs.

That’s a comparative choice between 2020 MCBs (more attractive) vs 2021 MCBs (less attractive). We’re not making an outright statement about whether it’s worth buying 2020 MCBs right now. If you want to read on how to go about analyzing MCBs as investment opportunities, you can take a look at our previous article (published Oct 2020).

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Appendix: Temasek’s stake in SIA should the MCBs get converted

The below shows SIA’s share count trajectory since March 2020, just prior it conducted its massive capital raising exercise via a rights issue and MCB issuance.

Temasek currently owns about 55% of SIA, or approximately 1.64bn of SIA’s 2.97bn shares outstanding. Assuming Temasek ends up subscribing to the same proportion of 2021 MCBs (as it did for the 2020 MCBs at 96%), and the MCBs end up being converted to SIA shares, Temasek would own approximately 77% of SIA.