Singapore Airways (“SIA” or the “Firm”) is providing new 5 yr notes (bond) at a coupon of three.03%, the place $200m is obtainable wholesale (i.e. $250,000 board lot to accredited traders) and $300m to retail traders (minimal subscription of $1,000). SIA could upsize the tranche to $750m if there are overwhelming response.
The curiosity on the bonds are payable semi-annually on 28 Sep and 28 March and can mature on 28 March 2024. The supply will shut on 26 March 2019 at 12pm.
The supply is made beneath the seasoning framework. Temasek lobbied very laborious for this framework with the intention of creating it simpler for firms (like herself) to problem bonds to retail traders because the prospectus regime is extra onerous for Issuers.
Temasek launched its first retail bond final yr and Singapore Airways is the following to do that. Hopefully, we will see higher high quality bond issuances arising beneath this framework. Nonetheless, traders should proceed to be discerning as different wholesale bonds resembling Ezra or Swiber would doubtlessly have certified as nicely.
Use of proceeds
SIA intends to make use of the bond proceeds to buy aircrafts.
Can SIA pay its bonds when it matures?
I cannot repeat the nice work achieved by different fellow bloggers. If you’d like a extra detailed evaluation on the financials or commentary which can be value studying, i’ve compiled them for you under:
I’ll share with you why i believe SIA will have the ability to pay its curiosity and bonds..
Firm continues to be extremely worthwhile and paying good dividends – Some bloggers expressed involved concerning the trade, the “internet debt” place and the low Return on Fairness.
The very first thing you are able to do to extend the ROE is to optimise the steadiness sheet. Having no debt on the steadiness sheet shouldn’t be “optimizing” it. To make fairness work more durable, it’s a must to have some leverage (not rather a lot until it may well’t repay the debt), particularly when curiosity bills are tax-deductible as nicely.
Provided that it has acquired a lot dividend over the previous few years, I’d count on Temasek to inject fairness (not like the case of Hyflux) by way of rights problem ought to SIA requires money provided that it has a downstream impression on different firms inside its steady as nicely. Nonetheless, do be careful for indicators if Temasek alerts that SIA is now not considered a strategic asset (as within the NOL case). Not like NOL that has been bleeding, SIA is worthwhile and the delight of the nation, therefore, i might count on that Temasek to proceed proudly owning it although ROE is low.
The steadiness sheet might be extra “environment friendly” now with a debt to fairness ratio of barely under 50%, however i’ll watch the ratio very carefully as i would not need it to cross 50%. The plane financing enterprise is fairly scorching now and with the aviation growth, the property could be offered for money because the planes are younger and may it needs to take action.
Relative Valuation in opposition to its personal bonds
Fundsupermart has issued a report and compiled the desk under. It might have been extra informative if they’ve additionally included the issuance measurement within the desk.
Primarily based on the desk compiled, the bond maturing on 25 Oct 2023 is buying and selling at YTM of two.9% whereas the bond maturing on 8 April 2024 is buying and selling at YTM of three.02%. As such, the present bond is pretty valued.
Relative Valuation in opposition to rated bonds or “risk-free” financial savings
Let’s check out different rated bonds on the market.
Evaluating with a “risk-free” Singapore Saving Bonds, the typical return on a 5 yr Singapore Saving Bond is round 2%. The great thing about SSB is you can apply as much as $100k with out being in the reduction of, not like Astrea IV and Temasek Bonds.
In comparison with the above IPOs, i might enterprise to say that Temasek and Astrea left some cash on the desk for retail traders whereas SIA is extra “stingy”.
Nonetheless, for the yield hungry retail traders right here, who’ve restricted funding choices, in all probability the SQ scraps are higher than the poisonous Hyflux perps. In case you ask me whether or not i believe SIA will go stomach up and default on their bonds over the following 5 years, i might say with a excessive conviction that it would not. Nonetheless, i’m not too attracted by the three.03% coupon both when i evaluate in opposition to the rated bonds, SSB and even rates of interest in CPF particular account.
What i like concerning the Firm
Temasek is the biggest shareholder with 56% – That is in all probability one purpose why it may well priced the bond at a lowly 3.03%. Nonetheless, do word that NOL was additionally considerably owned by Temasek earlier than it was offered (i.e. there isn’t a sacred cow). The purpose i’m making is that whereas being majority held by Temasek is certainly a plus, it doesn’t suggest that Temasek will step in if the Firm goes beneath. Though morally, it could have to because it includes the mother and pop traders and has downstream impression on different Temasek portfolio firms.
Skill to pay debt continues to be intact – The leverage (or gearing) ratio of SIA (computed as complete debt over fairness) has been rising during the last 8 years. As of 3QFY18/18, the ratio continues to be under 50%. Whereas the ratio continues to be low in comparison with different airways, it is going to be helpful to observe the gearing ratio within the coming quarters. The wholesale bonds are nonetheless buying and selling above par, in all probability indicating that institutional traders nonetheless just like the credit score profile of the bond.
Firm continues to be extremely worthwhile and paying good dividends – I’ve talked about earlier that the Firm is likely one of the most worthwhile airline firms on the earth. Within the occasion that it must tighten its belt, it may well lower the excessive dividend payout ratio and you’ll see it from the financials deteriorating additional.
A few of my considerations
Rising gasoline prices amidst aggressive panorama – The potential rise in gasoline costs will proceed to squeeze working margins. The airline trade can be extremely aggressive and SIA being a “premium” product, will face pricing stress from different airways. The truth that Singapore needs Changi Airport to be the important thing airline hub additionally signifies that it must be working at its greatest to compete with different premier airways like Qatar and Emirates that has a whole lot of “authorities” help. The rise of finances air gives extra selections for air vacationers however i might not count on it to adversely impression SIA
Excessive capital expenditure – SIA should at all times spend money on new planes with higher gasoline effectivity and maintain the age of the fleet younger. For instance, it may well restart the “longest flight on the earth to New York” solely due to technologically enchancment. This implies continually shopping for new planes to maintain the fleet younger and environment friendly. The bonds issuance is to pay for the supply of 37 A350, 39 B787 and 20 B777 scheduled for supply from 2019 to 2025.
Security rules over 737 Max – The current grounding of the 737 MAX aircrafts at Silkair can also impression the corporate. It’s pricey to maintain idle planes on the bottom and there’s no visibility over when the ban might be lifted. There’s one other 32 on agency orders. In any case, the trade is very regulated.
Deteriorating financials and the bonds should not secured – The profitability of SIA could be risky and the Return on Fairness has hovered between 3-7%. The Firm has additionally turned extra extremely geared in recent times. As well as, the bonds should not secured. The Plane securitisation market has been very buoyant in recent times (particularly China), the place the bonds are secured by the planes.
The rate of interest shouldn’t be engaging sufficient to compensate the danger – Whereas i consider the Firm will have the ability to pay its debt, i do not assume it’s excessive sufficient to compensate traders. It’s priced too tightly to the two.7% Temasek AAA-rated bond. You could argue that the rate of interest setting has change into extra benign however at 3.03%, it’s a tad too low for my funding wants.
Mr IPO chili scores
I like the best way Monetary Horse phrased it as to who will discover the SIA retail bonds appropriate – Excessive internet value people with extra money or retirees who desire a low threat funding that’s larger than the danger free charge.
With an choice to upsize, retail traders will in all probability have the ability to get a bigger allocation than that of Astrea IV or Temasek.
For me, i even have combined emotions. On one hand, I’m comfortable that T-chip firms are serving to to open up the retail bond market, then again, i might have most well-liked a excessive rate of interest of not less than 3.5%, provided that it’s un-rated and never secured.
Subscribe provided that you just like the credit score profile of Singapore Airways and has spare money that you’re placing into financial institution deposits for the following 5 years. I’ve different makes use of for my money.
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