100 shares are entitled to receive 209 MCB.

1) Holders of  100 SIA shares are entitled to receive 209 Mandatory Convertible Bonds (MCB), denominated at S$1.00 per MCB.

2) The rights are renounceable  but Temasek, which has a 56% stake in SIA, has a given an undertaking to take up its share or any unsubscribed portion. In 2020’s MCB issuance, 96% of the issuance was taken up by Temasek.  Even SIA’s CEO, did not take up his share of MCB

3) The 2021 MCB ise a zero-coupon bond and will mature on 8 June 2030.

4) The MCB will have a yield to conversion of 4% for the first 3 years, 5% for the next 2 years and 6% for the remaining period. Effective yield for the duration of the bond is 6%.

5) SIA has the option to redeem the MCB( callable bond) every 6 months from the issuance date of the bond but the odds of SIA redeeming the bonds over the next 3 years are low given that SIA has substantial capital commitments.

6) At maturity period, SIA will redeem the bond only via shares at a conversion price of S$4.84. For example, S$1000 MCB at maturity would amount to S$1697.97 and would be converted to 350.82 shares. ($1697.97/$4.84)

Points to consider.

1) What are the odds of SIA redeeming the MCB in full  ? We think that the odds of SIA redeeming the bonds over the next 3 years is low, unless it can be funded via a cash call.

2) Can SIA redeem the MCB partially in cash ? yes it is possible, but for SIA’s minority MCB holders, there could be a risk of only partial redemption with the rest to be redeemed at maturity via cash.

3) Are other other sources of investment which yields dividends ? In the SG aviation equity space, there is ST Engineering, which is AAA rated and is also owned by Temasek and has the capacity to pay out 15  S cents in dividend annually. At S$3.85, the stock would offer about 3.9% dividend yield.