“Willie, can subscribe to SIA’s MCB, or not?”
Before I answer that, let me ask you: “What’s a bond?”
When you buy a bond, the company owes you money.
You don’t own a single bit of the company and any of its future profits.
Unlike a stock.
But you own the legal right to be paid back the money you paid for the bond — on a specific, fixed date, called “maturity date”.
Example: You buy a Singapore government bond with a maturity date in 2030.
The government pays you an interest rate – called a “coupon” — every year for taking your money.
Sometimes, this coupon is paid twice a year.
In 2030, the government pays you back all your money you used to buy the bond.
Remember this: As a bond owner, you’re entitled to be paid coupons and get back your capital on the maturity date.
You don’t need to worry about any stock market drama.
Because your payments are legally protected.
So what happens when a company goes bankrupt?
The court will tell the company to sell off all its assets and properties — including office computers and chairs — to pay you off as much as possible.
This way, your money is safe in high quality bonds.
What I think about buying SIA MCB?
Now, what happens if you own a bond that doesn’t pay you any coupons?
And what’s worse, it has no specific date to pay you back your money?
That’s not all.
What if the company chooses to return your money in company shares instead?
If the company stock is doing well, why not.
But what if the stock keeps falling, further than any time in history?
The investment bankers call it a ‘zero-coupon’ bond.
Singapore Airline (SIA) calls it the Rights 2021 Mandatory Convertible Bond, or MCB.
A Rights 2021 MCB is a zero coupon bond — there’s no fixed interest paid to you.
And at the end of 2030, you get back new SIA shares. Instead of your money.
The Rights 2021 MCB is completely different from a bond.
But this is the interesting part.
Every year (before 2030), SIA can choose to buy the MCBs back from you in cash. Plus give you extra cash called a “premium”.
Say you invest $100 in the MCB. If SIA decides to buy back the MCBs in Dec 2022, they will pay you $106.121 (see red line below), instead of $100.
If they choose to buy back the MCBs in Jun 2025, you get back S$117.166.
Source: SIA Company Presentation
That’s provided if they can buy back the MCBs.
What if SIA can’t buy back the MCBs?
You see, I shared in my previous article, that air travel is like an “elastic good”.
A small change in price leads to a big change in flight demand.
If you go for holiday and air ticket prices drop, wouldn’t you rush to find that cheaper alternative, for the same standard of flight
People would. I would.
People are more sensitive to air ticket prices.
And they try to fly less when prices are high than when they are low.
That’s why low cost budget carriers are disrupting SIA’s flight routes.
I agree with Warren Buffett — the airline industry suffers from a near-perfect competition.
Now here’s the next problem.
This is not the first time SIA has issued an MCB.
Last year, it sold SIA MCBs to shareholders.
But the response to buy the MCBs was so bad that Temasek ended up buying 96% of the entire thing.
In fact, SIA directors also did not subscribe to the MCBs themselves.
Would I buy SIA’s MCB today?
You see, SIA suffered from a global collapse in air travel due to the COVID pandemic.
In fact, its latest financial results, SIA carried 98% less passengers as compared to the year before.
And it racked up S$4.3 billion in losses.
This is way bigger than losses of S$212 million in the previous year.
What’s even more alarming is SIA has S$7.7 billion in cash, but has to pay off S$14 billion in debt — that’s close to the size of Brunei’s GDP.
I don’t own SIA shares.
But if you ask me, if it’s worth subscribing to the Rights 2021 MCBs? I’d give it a miss. I find it’s a terrible deal for shareholders.
It neither gives you the legal protection of a bond, nor gives you the right to a stake in a struggling business. Perhaps, another way to look at air travel play is this Singapore dividend stock.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan