“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?
Does this sort of bond exists? Yes.
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
The accounting of this MCB is even more outrageous than the deal itself. SIA essentially get the 10 whole cakes and eat it all!
Hey GS! Agreed. The MCBs are considered “equity” in the balance sheet. So this makes SIA appear less leverage than it truly is.
What’s more, it’s like telling investors: “if you don’t want then too bad, Your shares just going to get diluted, anyway”.
What happens if I give this mcb a miss. Anything would happen to my stock ?
Hi S Leong!
Nothing will happen to your existing shares. But, your shares will get diluted in 2030 if other people subscribe to the MCB. Because in 2030, the MCB automatically gets converted to shares. Unless, SIA chooses to redeem to MCB anytime before 2030.
Hope this helps 🙂
Willie
Hi, just wanted to know if I giving the MCB a pass, would there be any further action required. e.g. selling the rights? I’m fairly new to MCB, do advise. thnks in advance!
Hi Alicia,
This is the first time I’m seeing such a weird investment structure too.
If you’re giving MCB a pass, you won’t be issued any of the Rights 2021 MCB. No further action is required.
Hope this helps!
Willie
wow! thats was fast. Thank you so much for such prompt reply and the advise!
Cool!
Will we be able to sell the rights on SGX as of now? Just like MCB in 2020.
Hi Kai,
Yup, you can trade your rights on SGX during the trading period. You can refer to SIA’s MCB 2021 FAQ right here: https://www.singaporeair.com/saar5/pdf/Investor-Relations/Rights-Issue/Rights_2021_MCBs_FAQ.pdf
Hope this helps!
Willie
Hi, Thanks. I am quite new to this. Have been searching for the SGX code to put up the sell request but doesn’t seems to find it. From the link it seems like the last day for trading the rights is 10Jun. Are you able to point me to the SGX code? Appreciate alot.
Hey Kai!
I’m so sorry, but I’m not sure about the SGX code for the rights. I don’t own SIA shares.
But I’ve seen two new tickers created here:
SIA LTD R (ZJGR / SIAL.SI)
SIA LTD R1 (1P2R / SIAL.SI)
Perhaps it could be either one.
I hope this helps!
Willie
Yea it helps. And I was suprised to see that it worths nothing.. lol
Lol, that’s quite funny :X